The first year of college is a lot of adulthood all at once, so it’s easy to make mistakes right out of the gate—especially when it comes to money. Tens of thousands of dollars in credit can be easily wasted, credit scores can be ruined, and the debt accrued can stick around for decades. With that in mind, here are some ways to avoid ruining your credit before you’ve even chosen a major.
Use your credit card like a debit cards
To a young adult living unsupervised for the first time, credit cards can seem like free money—or a problem for future you to worry about. But to avoid the temptation of overspending, treat your credit card like a debit card, and never charge anything unless you can pay it off right away. The interest rates on credit cards are absurdly high, and missed minimum payments can sink your credit score for years (and your credit score is what determines whether you can buy a car or home, or even rent an apartment). Credit Card Insider has a good example of what a seemingly minor lapse of judgement can cost you:
If you charge $3,000 to a credit card with a 17% APR, for example — and only pay the minimum each month — it’ll take you 10 years to pay off your initial balance, by which time you’ll have paid more than $2,200 in interest. Not cool.
The mistake I made in college was assuming I had the rest of my life to pay off a bit of extra spending in my first semester. The truth is that once your debt starts growing with interest, it can be very hard to pay if off, especially in your teens and early 20s, when your earning power is at its lowest point. For more information about how to use your credit card responsibility, read this.
Don’t use all of your student loans if you don’t absolutely need to
While the interest on your student loans is low compared to other types of credit, that doesn’t mean you should use all of the cash banks are willing to lend you. Consider that the average student borrower takes 20 years to pay off their student debt, and that they will pay $26,000 in interest alone during that time. This means you’ll be saddling yourself with monthly payments worth hundreds of dollars well into your thirties, with a big chunk of that going towards interest. After college, the size of these monthly payments will determine whether you can afford to live without roommates or buy a used car.
To get an idea of how this works, play around with a student loan repayment calculator and see the difference for yourself. For example, the difference between $45,000 and $40,000 in loans over the 20-year repayment period means you’d be paying back $322 instead of $287 every month—all 240 of them.
Create a budget and stick to it—especially if you’re living off of those loans
Studies suggest students already spend more in college than is strictly necessary. Compounding the problem is the fact that most teenagers are inexperienced with money and prone to making impulsive decisions with it. This is why it’s important to get into the habit of budgeting early, when it matters the most.
To determine how much of your student loan you actually need, use a student budget calculator to create your monthly budget for the year. Some expenses like tuition and textbooks will be fixed, but you’ll have more flexibility in planning and adjusting your living expenses and discretionary spending. This might involve some short-term sacrifices—like, say, living with your parents instead of in an off-campus apartment. But these sacrifices will set yourself up for more financial independence after graduation. Either way, the goal is to find a budget that’s reasonably comfortable and won’t put you too deep into debt.