Credit Cards 101 for College Students

Credit cards are an important financial tool in a college student's wallet.

Unfortunately, many students fail when it comes to understanding the basics of using a credit card, according to a U.S. News survey of college student cardholders. In fact, 44 percent of respondents said they weren't educated by their parents or teachers on important credit card topics, and more than one-third of those surveyed didn't know their credit score.

A lack of understanding around student credit card usage is worrying, experts say. "There's no shortcut to mastering these things," says Douglas Boneparth, president of Bone Fide Wealth in New York City and co-author of "The Millennial Money Fix."

And while college campuses are no longer the Wild West of student credit card marketing like they were before the Credit CARD Act of 2009, college students may encounter credit card advertisements on and around campus, or in their email inboxes, and feel tremendous pressure to sign up.

So, what should college students learn about using, not abusing, their credit cards? Here's what to know.

[See: Basic Money Lessons You (Probably) Missed in High School.]

Take it seriously. First things first, learning how to manage a credit card is incredibly important. The credit card mistakes you make in college could haunt you for years. Damaging your credit could make it difficult to get an apartment, secure a car loan or even land a job (some employers may check your credit history when considering you for employment).

Paying off credit card debt -- in addition to student loans -- could leave you broke during your post-college years, preventing you from taking career risks, getting married or going for a graduate degree. "Every decision that's made today in how [college students] spend their money, no matter how big or small it is, it does have an impact on your credit for years to come," says Brie Williams, head of practice management at State Street Global Advisors.

So, it's essential that college students understand -- and are ready -- to handle the risks before applying for their first credit card.

Build a budget. If you don't know the fundamentals of building a budget, then you're not ready for a student credit card, experts say. "The biggest mistake I see is people using credit instruments, like a credit card, without first having discipline with their finances, specifically around cash management," Boneparth says.

College credit card users should follow a budget that tracks what money is coming in -- income, student loan disbursements, scholarship payouts and other sources -- and what's going out -- rent, utilities, entertainment expenses, textbook purchases and more. Build credit card spending and monthly credit card bills into the budget to make sure that you never miss a payment. If you're concerned that you won't be able to stay on top of credit card bills, then just use your card for small and predictable expenses, such as gas or your Netflix membership, and pay it off each month, experts say.

If you don't have your budget in place, then you're likely to carry a balance from month to month, resulting in interest accrual, late payment fees and other unnecessary charges.

[See: What to Do If You've Fallen (Way) Behind on Your Credit Card Payments.]

Don't max it out. For many first-time student credit card holders, their cards come with a low -- very, very, very low -- credit limit. But just because your credit limit is $600 doesn't mean you should charge $600 on your card each month, experts say.

In fact, maxing out your credit limit harms your credit score by dinging your credit utilization rate, a measure of how much available credit you use. You want to keep that rate below 30 percent to keep your credit score high, which means charging just $180 on your $600-limit credit card.

Understand interest rates. Among student replying to the U.S. News survey, nearly half didn't know the annual percentage rate, or APR, on their credit card. But understanding this number is crucial, experts say.

"People don't understand how compound interest is really truly evil," says Beverly Harzog, credit card expert and author of "The Debt Escape Plan: How to Free Yourself from Credit Card Balances, Boost Your Credit Score, and Live Debt-Free." "Especially when you're new to credit you'll probably have a fairly high interest rate, a high APR. When you carry a balance with a high APR, it gets really bad in a hurry."

Compound interest -- when interest is charged on interest -- makes just a few months of not paying off your credit card balance especially harmful. Your debt will grow exponentially the longer you put off paying down your bill.

[See: Dear Younger Me: 12 Financial Truths We Wish We Knew Earlier.]

Do your research. Before you get that credit card, do your research, including reading the "Schumer Box," an easy-to-read section of your credit card agreement that includes the rates, fees and terms of a credit card.

If you can discuss credit card basics with your parents, and perhaps go over one of their credit card statements, that can be a helpful learning exercise, experts say. If you can't discuss credit cards with your parents, consider turning to a financial literacy class or initiative through your financial aid or residential services offices. You can also research the basics online through a resource such as U.S. News.

Remember: Credit cards aren't anything to fear. They can be powerful financial tools when used correctly. But for college students who use them without doing the appropriate research and budgeting work first, they can drag down their credit scores for years to come.

Susannah Snider is the Personal Finance editor at U.S. News. Since 2010, she has reported on a wide range of personal finance topics, from consumer travel to college financial aid, student loans and employment. Snider previously worked as a staff writer at Kiplinger's Personal Finance magazine and holds a master's degree in journalism from the University of Southern California. She has appeared as a personal finance expert on television, radio and in print, including on "Fox & Friends," "The Tavis Smiley Show" and Fox Business News. You can follow her on Twitter or email her at ssnider@usnews.com.