By the end of this section, you will be able to:
- Identify the benefits of having a credit card and choosing one wisely.
- Set personal limits for your credit card use to minimize your debt.
- Describe steps to take to avoid overusing a credit card.
- Understand the importance of a good credit history and how to obtain and review your credit report.
Credit cards are such a big issue because they are easy to get, easy to use, and for many people, addictive. Until new regulations in 2009 and 2010, many college students got deeply in debt and experienced financial disaster. The new regulations set limits to prevent such serious problems for students under age twenty-one, but older students may still experience problems from overuse.
Credit cards do have legitimate purposes:
- In an emergency, you may need funds you cannot obtain otherwise.
- You generally need a credit card for travel, for hotels, and other needs.
- Often it’s less expensive to make significant purchases online, and to do that you usually need a credit card. (Many ATM debit cards also function like a credit card for online purchases.)
- Responsible use of a credit card is a good way to start building a credit rating, but only if you use the credit card responsibly and always make sufficient payments on time.
Even though federal regulations require banks to disclose all fees and make it more difficult to increase fees or rates without warning credit card holders in advance, many people overuse credit cards and pay high interest rates and fees for making late payments. The average American household has credit card debt of $5,000 to $8,000 (reports vary). College students reportedly are more likely to be late with payments and incur additional fees.
Your first goal with a credit card is to understand what you’re getting into and how you are charged. Read the fine print on your monthly statements. You should understand about rate increases and know what happens if you miss a payment, pay less than the minimum, or pay late. It pays to shop around to determine what credit card is right for you.
All credit cards come with a limit, the maximum total amount you can charge, but this is not the same as the limit you should set for how you use the card based on your budget. If you bought something that cost $400, for example, would your monthly budget let you pay it off when the bill comes? If it will take you two or three months to have that much available in your budget, are you also including the interest you’ll be paying? What if an unexpected need then arises and you need to charge more?
Set your personal use limit by calculating how much your budget allows you to charge. If you are using the card just for convenience, such as to pay for meals or regular purchases, be sure you have enough in those categories in your budget left at the end of the month to make the payment. If you are tempted to buy a significant item with your credit card, do the calculations in advance.
If your credit card debt is not limited by your age, that balance can rapidly rise. Before the 2010 regulations, the average student had accumulated a debt estimated as high as $3,000. The following tips will help you avoid credit card debt:
- Pay with cash when you can. Use your budget as a guide for how much cash to carry with you. A good way is to plan how much you’ll need for a week and start the week with that amount of cash.
- Make it a priority to pay your balance in full every month. If you can’t pay it all, pay as much as you can.
- Don’t get cash advances on your credit card. With most cards, you begin paying interest from that moment forward, so there will still be an interest charge even if you pay the bill in full at the end of the month. Also, cash advance interest rates are often considerably higher than purchase rates.
- Don’t use more than one credit card. Multiple cards make it too easy to misuse them and lose track of your total debt.
- Get and keep receipts for all credit card purchases. Don’t throw them away because you’ll see the charges on your monthly statement. Write the amounts down in your spending budget. You also need the receipts in case your monthly statement has an error.
Reviewing Your Credit History
If you have ever had a loan or credit card, you already have a credit history. It can be important to know what is in your report. Errors are common in credit histories and, if not corrected, can hurt you in the future.
You are entitled to a free copy of your credit report every year, and ideally you should check it every year for possible errors. To obtain a copy online, go to http://www.annualcreditreport.com. This is a government website, and the report is free.
Once you receive your credit report, go over it carefully to make sure its information is accurate. If you have paid off and closed an account, for example, it should not be listed as still open. Make sure all accounts listed actually belong to you and that the balances listed are correct. If you do find an error, report it promptly, following the procedure on the credit bureau’s website.
It’s also important to keep good financial records. Don’t immediately throw away your credit card statements or loan papers. You may need these to prove an error in your credit history.
Making informed decisions about credit card use and checking your credit report are two important steps you can take now to establish a better financial future.