Welcome, Freshman: A College Guide to Credit Success

Sending your child off to college is a monumental milestone, and while you’re probably focusing on packing lists, course schedules, and student loans, there’s another essential topic that deserves attention: credit utilization. Learning how to manage credit is a crucial skill that can set your freshman up for long-term financial success.

First things first—what is credit, and why does it matter? Credit is essentially borrowed money that you’ll pay back later, often with interest. It comes in many forms, like credit cards, student loans, and car loans. Credit is more than just a way to make purchases; it’s a tool that can open doors to things like renting an apartment, buying a car, or even getting a job.

But here’s the catch: building good credit takes time and responsible management. This is where many college students stumble, simply because they don’t understand how credit works. In a recent survey from U.S. News & World Report of undergraduate students, over four in ten say they currently carry credit card debt.

For many students, their first exposure to credit is through a credit card. This can be both exciting and daunting. The key is to start with a low-limit credit card, ideally one with no annual fee, and use it sparingly.

Using a secured credit card responsibly is an excellent way to build credit without taking on too much risk. Our trusted partners at BECU suggest keeping your utilization low—ideally under 30% of your credit limit—and paying the balance in full each month to avoid interest charges and build positive credit history.

Encourage your freshman to think of their secured or low-limit credit card as a debit card—only charge what they can afford to pay off in full each month. For example, if they use their credit card to buy textbooks, make sure they can pay that balance when the bill comes due. Paying the balance in full each month helps avoid interest charges and builds positive credit history. A missed payment, on the other hand, can result in late fees and damage their credit score. Remind them that credit card companies report their payment history to the three major credit bureaus, and a late payment can stay on their credit report for up to seven years.

The biggest mistake students make is an obvious one: overspending. It’s easy to swipe a card without thinking about the consequences, especially when you’re surrounded by the temptations of college life—nights out, new clothes, and spontaneous trips. But credit isn’t free money, and those balances can add up quickly. If your student carries a balance, they could end up paying a lot more than they originally charged.

For instance, imagine your student buys a couple of new outfits and dines out a few times, racking up $300 on their credit card. If they only make the minimum payment, the interest on that balance—given the average credit card rate of around 20%—can cause that $300 to grow into $400 or more by the end of the year. This extra cost comes from interest, which is charged on any unpaid balance.

To avoid this, set some ground rules. Perhaps they use their credit card only for essentials like groceries or gas. Another good strategy is to encourage them to keep track of their spending with a budgeting app. This can help them stay within their means and avoid unpleasant surprises when the bill arrives.

Credit isn’t just about steering clear of mistakes; it’s also about cultivating positive habits from the start. Encourage your student to check their credit report at least once a year. They can do this for free through AnnualCreditReport.com, which provides access to their reports from the three major credit bureaus—Equifax, Experian, and TransUnion. Regularly reviewing their report helps them stay informed about their credit status, identify any errors, and detect any signs of identity theft early on.

Setting up automatic payments for their credit card bill is another best practice. This feature, available through most credit card companies, ensures that their bill is paid on time each month. Since payment history is the most significant factor in determining a credit score—accounting for 35%—this habit helps maintain a strong score by avoiding late payments.