Friday, May 20, 2011

Real Talk: Student Bank Accounts, Credit and Finances

First let me start off this post by emphasizing that I am i no way a financial expert and any advice I give is based off of my personal financial knowledge, which comes mostly from my financially stable parents, and some economics and accounting classes. Please remember that I am currently a college student and you should always consult with a professorial or expert before making any big decisions regarding your finances.

That said, let's talk about bank accounts, credit and finances. I spend a lot of time talking about ways to earn extra money , but what do you do when your first check from Treasure Trooper or Inbox Dollars arrives? Perhaps you have a joint bank account with your parents and they can deposit the money for you, as well as keep track of your finances on your behalf (this was me for quite a while!) Or perhaps you already have a bank account and are well-versed in managing your own finances, but do not have any credit or investments. What steps, if any, should you take to begin building a foundation for your finances in the future?


First, the basics: How to Open a Checking Account. A checking account is a bank account that allows you to withdraw money by writing checks or by using a debit card at an ATM. Unlike credit cards, debit cards withdraw money immediately out of your checking account and if there is no money in your account, you may be charged an overdraft fee. Up until recently, the majority of checking accounts were free. However due to the recent Overdraft Protection Act, which is meant to protect people from exorbitant or frequent overdraft fees, banks are losing money by offering free checking accounts and have begun charging monthly fees. Few banks remain with free checking accounts, and most of them are switching to monthly fee systems within the next year or so.

College students, however, are happily exempt from these changes (at least for the time being.) We can open what's called a Student Checking Account: it's basically the old free checking model, but it's now only available for students. Of course, every bank is different and some may or may not offer this option, so check with your local bank first. I can tell you that one bank that DOES offer Student Checking Accounts is U.S. Bank, which is one of the largest banks the country with locations everywhere except the east coast. (Note:I originally found U.S. Bank because it still has free checking accounts, but it turns out that next month those will be switched - it is however still listed on their website at this time.) With the U.S. Bank Student Checking Account, you get free checks and no monthly fee or minimum deposit. It's valid until you turn 25, at which point you will need to switch over to a regular checking account - so cross your fingers that you can afford the $8.95/month fee by then!

Now once you have your student checking account and have deposited some money into it at the bank (just walk into the bank with your check and ask a teller for help depositing if you need a walkthrough! It's super easy) you need to avoid overdraft fees. Like I mentioned before, an overdraft fee is when you go to get money out of your account and there is no money available, but you take out money anyway which leads to fees - usually something like $30-$60 per overdraft charge. The Overdraft Protection Act makes it possible to opt out of overdraft protection - meaning if you go to purchase something with your debit card and there are no funds available, your card will simply decline, avoiding any overdraft fees - but potentially rendering you without access to money, so ONLY choose this option if you have a second card available or carry cash at all times in case of emergencies! You can also opt into overdraft protection, which lets you set up a secondary account or card so that when you go to spend or withdraw money and your account is empty, it will be automatically transferred to your secondary account or card instead. IMPORTANT: you can still be hit with overdraft fees from automatic bill-paying or writing checks without having sufficient funds in your account! To avoid overdraft fees once and for all, ALWAYS monitor the money available in your account. You can look at your balance using online banking at most banks.

So now you have a checking account with some money in it and you've been careful about knowing your balance to avoid overdrafting. You're on your way to being financially responsible! The next step you should be taking is Building Your Credit. Credit may not be very relevant to your life right now, but once you graduate from college it will be EXTREMELY important. You will need a credit history (and preferably, a good credit score) to rent an apartment, buy a car, get a loan or buy a house. And if you graduate without any credit, you might find yourself unable to find a place to live - most apartments will not rent to anyone without credit history, so unless you can find a co-signer with good credit to add their name to your lease, you could very well end up homeless or couchsurfing. Building credit takes time, and you can't do it immediately, which is why it is very important to start NOW while you're still in college (and not homeless or couchsurfing, hopefully!)

There are only two ways to build credit. The first way to build credit is by taking out a personal loan and making regular payments (on time and in full) on your loan. This is a tricky option because it is hard to GET a loan without credit, which is exactly what you need right now. Yes, it's a total Catch-22. So what that means is as a college student, the best way to build credit is to open a credit card. Unfortunately, having a credit card can also ruin your credit and cost you a lot of money in interest fees - so you should ONLY open a credit card if you are absolutely sure you can pay your bill off each month on time! If you think you can handle the responsibility of a credit card, consider opening one with your local bank and linking it to your checking account. Some banks may offer automatic bill pay so that you can have your credit card bill automatically transfer the money from your debit account. You can also earn rewards through your bank in this way - for example, U.S. Bank gives 1% cash back rewards on EVERY purchase made with your credit card. Another option is to open a credit card with a lender who is not a bank, such as a retailer or store. If you shop at the store frequently, you can earn money back and rewards for your purchases. Some stores, such as New York & Company, even let you pay your bills just by walking into the store and handing over some cash. Store credit cards frequently have high interest, but no annual fee - meaning as long as you pay them off as SOON as you make a purchase, you can keep them open with no balance indefinitely, building your credit and getting rewards without racking up debt or fees. Here is an article about the dangers of store credit cards. Remember - you should ONLY open a credit card if you are ABSOLUTELY POSITIVE that you can pay the bill off IN FULL and ON TIME each month, preferably as soon as you make a purchase with your card. Also, some banks and retailers may have a minimum age requirement to open a credit card.

If you are financially dependent on your parents, talk to them about some options regarding opening a credit card under your name. For example, my parents gave me an emergency credit card several years ago with a VERY low limit (like $250 per month). I only use it in the case of emergencies or when my parents have already agreed to buy me something (like filling up my tank, or a birthday present) and the bill is automatically sent to my parents who then pay it on time for me. Even though I only use it a few times per year, it is building up my credit score which will be very helpful when I graduate from college. If you are fortunate enough to have financially stable parents who don't mind helping you out with a few bills, this could be a very good way to build your credit.

You can NOT build credit by paying bills- although paying your bills late can HURT your credit. The same also applies for renting an apartment - it won't build your credit (though it will build your rental history which will be very important when you go to rent an apartment in the future) but if you don't pay your rent on time it could HURT your credit score. Ideally by the time you graduate, you have built up a little bit of credit and will have little trouble renting an apartment or taking out a loan for moving expenses, a car, etc.


Now, the last item on the agenda: finances - aka, managing, saving and investing your money. Say you are a graduating college senior (like me!) with a solid understanding of how to budget and manage your money (what little you may have, at least) and a decent beginning to your credit history. Should you be looking into making some financial investments? Frankly, no. Unless you have a brilliant understanding of the stock market already, investing isn't something you need to think about right now. You don't have enough money to go and give it away to someone else in the hopes that you'll get more of it back later - you need that money right now, to start your new life as a graduate. It won't be until the first or second year out of college, when you're more stable, with an extra 6 months or so of emergency funds saved up in your account, that you will have room to think about tucking some of that money away. At that time you'll probably start looking into saving some of your money for retirement in a 401K or IRA; putting some of it in the stock market, a CD or a mutual fund; or even consulting a financial planner to see what options you have available to you. But until then, just keep doing what you're doing and don't worry about it. You have the rest of your life to invest money that accrues interest, and while you're still living by the skin of your teeth you don't have that much to spare. If you happen to have parents or family members who have invested some money for you, or a savings account that has been accruing interest for some time, just leave it in their care until you're financially stable and can take on the responsibility of handling all of your own money: a few years out of college and earning your own income, say. Final verdict? Until you're financially stable, don't worry about finances. That takes one thing off your plate, eh?

For some more tips and different points of view, read these articles:
27 Money Tips for College Students
Top 10 Student Money Mistakes
Top 5 Money Mistakes College Students Make

If you have any questions, comments or advice, please post it in the comments or on my facebook page!

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