Many college students are not well-equipped to make sound financial decisions, and there are a couple of reasons why. For one thing, they haven’t had to manage their own finances to this point. Even those that have held a job or had to maintain an asset like a car have had help from their parents. Very few students reach college with the experience of paying for rent and utilities under their belt. But even worse is the fact that they have received little to no education on the subject of personal finance. They might not even have a bank account, much less the knowledge needed to earn, save, budget, and build credit. Unfortunately, this makes them prime targets for credit card companies, who swoop in to offer young adults what seems to be “free” money, but actually comes with unfavorable terms such as high interest rates, annual fees, and more. So if it happens that you’re not particularly savvy when it comes to financial matters, here are just a few guidelines to help you make wise decisions during your time in college.
The first and perhaps most important lesson is that you must live within your means. This can be a tenuous undertaking when you are forced to take on the debt of student loans, you are living off your parents, or both. But you’re now an adult and it’s high time you learned how to handle your money in a responsible manner. And the easiest way to start is by creating a basic budget. You know what your expenses are, and if you don’t you should sit down with your parents to figure it out. Your list should include tuition, fees, and related expenses, as well as dorms, a meal plan, and other living costs. If you have a car, you’ll need to include loan payments and all associated costs such as registration, insurance, fuel, parking, and maintenance. And you’ll no doubt have other items to add.
From there you can add your income to the equation, and that should include not only the money you make from a part-time job, but also funding that comes from scholarships, grants, federal financial aid, other student loans, and of course, any contributions from your parents. You may not control a lot of your financial situation during your time in school, especially if your parents are helping out with direct payments to the school for services that you receive, but it’s important to understand the costs of living your life because all too soon you’re going to have to take them on yourself.
For this reason you also need to start considering your credit score. If you’re smart, you’ve steered clear of most of the credit card offers that have come your way. On the other hand, you can’t hope to build credit by using a card attached to your parents’ account. You need your own credit card if you want the opportunity to improve your credit score. So do your homework, read the fine print, and find one that offers you favorable terms. Then use it sparingly (to pay for food or gas, for example) as a way to begin building the credit you’ll need to lease an apartment or take out a car loan after college. Just because you’re getting an education at the University of Cincinnati, NYU, or UCLA doesn’t mean you automatically know how to manage your finances and make wise decisions where your money is concerned. But if you’re smart you’ll make an effort to learn what you can while you’re in college so that you’re prepared to fend for yourself financially once you’ve earned your diploma.
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This trick only really works if your parents have good credit themselves. If they do, you can borrow on theirs a bit by letting them add you as an authorized user to one or two of their credit cards. If they practice good credit habits, like paying off their cards every month, avoiding standing balances unless they absolutely have to, and keeping a low debt-to-income ratio, then you’ll benefit from their good behavior as well. It’s a technique called ” Piggybacking ,” and while it’s controversial, FICO allows it specifically as a tool for children to build credit while benefiting from their parents’ healthy credit habits (or learning their own under the watchful gaze of their parents) and for spouses where one partner is trying to repair or grow their credit and the other’s credit is already in a good place.