Despite the apparent credit crunch and troubling times, college students are still applying for and receiving credit—whether for cars, computers or college. According to a study by Sallie Mae, a private student loan company, more students are using credit than ever. However, many do not entirely understand the concept of credit.

To some, credit is simply the thing that one uses to acquire things that they cannot pay money for. This is where some people get into trouble, since credit is more than just a money-lending system.

Like some college students, Emilea Burton, a sophomore in zoology, knows the basics of credit.

“I know how interest works and how credit cards work,” Burton said, adding she was totally unfamiliar with the concept of credit just a year ago.

However, Burton also realizes that there is still much for her to learn.

For others that do not know anything about credit, there is even more to learn.

By definition, credit is borrowed money that can be used use to pay for certain items without money on the premise of repayment of the funds by a certain time.  But there is much more to it. Students should be wary of deals that are too good to be true, like cards with low, but adjustable, interest rates. They must also remember that the credit they set up now will stay with them after college.

When dealing with credit, there are three important parts: consumers, financial companies and credit bureaus—all of which play an important part in establishing, developing and receiving credit. Here’s a visual breakdown of how it all works, and how it affects you.

How it works

Credit begins with the individual consumer. Upon first applying for credit—possibly in the form of pre-approved credit cards or college loans—a credit history is established.

This history is shared with the three national credit bureaus, Equifax, TransUnion and Experian, which keep this information for future credit inquiries from creditors.

When buying a car or applying for a loan, banks and auto lenders will request this credit history, which is translated into a credit score that is used to determine whether there is any risk in issuing credit.

Tips for College Students

Bureaus don’t share information

  While individual consumers’ credit histories are shared with the bureaus, they themselves do not share information. So, depending on the bureau, your credit history and credit score may be different.

High interest rate vs. low interest rate

  If there appears to be little or no risk, the lender will issue the credit at a lower interest rate. However, if there appears to be a higher risk, the lender will more than likely issue the credit with a higher interest rate, or not offer the credit at all. Another type of rate is the adjustable rate, when interest rates change over time. Adjustable rates may seem good, when they’re low, but they can skyrocket easily.

    An example of the problems adjustable rates can cause is the economy today. The housing and financial markets were overloaded with defaulted loans that people could not pay because their interest rates increased.

Say no to high spending limits

  Just because credit card companies are offering credit cards with high spending limits does not mean that you should accept them. Though a high limit is good for someone who brings enough money in each month to cover it, often times, they are traps—especially for college students. Instead, apply for cards that have lower credit limits so that you will not be tempted to “run up” the credit.

Bad credit now, bad credit later

   Remember that the decisions you make with the credit that you have now will not only affect you now, but in the future as well. Credit information usually stays on your credit history for at least seven years. That decision to buy a year’s worth of beer and Pokey Stix on your credit card may not seem like such a good one later on.

“If you don’t like it, you can cancel it at any time”

  This is a line that you will hear from many companies trying to push credit cards to college students. However, you should be incredibly weary of this appeal, as canceling cards may end up lowering your credit score.

Manage your bills, pay on time

 This simple piece of advice will go a long way in the end. It’s going to be a pain to remember to pay a bill every month, and no one likes to see his or her savings account depleted by hundreds of dollars, but, really, it’s worth it. Positive credit history results in a good credit score, which results in lower interest rates in the future. And what does your future hold? Probably a lot of stuff more expensive than a shopping spree at Crabtree.

Sources

Sallie Mae, credit.com, JP Morgan Chase and Co., AIE.org