Getting and Using a Credit Card

One of the most controversial aspects of personal finance is the use of credit cards. While credit cards can be an incredibly useful tool, their high interest rates, combined with the how easily credit cards can bury you in debt, make them extremely dangerous if not managed correctly.

For many college students, who may not have a lot of money or even a job at all, owning a credit card may seem out of reach. Without money in an account and assurance that you can pay your monthly credit bill, the average student may not seem very credit-worthy. Still, it can be important to build a credit history for certain opportunities down the road (such as getting a loan to buy a house). You may be surprised to learn that there are plenty of companies that offer special options for younger customers, especially students. The following are some offers to look for:

• Error forgiveness: Since you may be new to the responsibility of owning a credit card, it’s good to look for plans with error forgiveness. This may include a zero-percent annual percentage rate (APR) for the first six months of a contract or waive user penalties if you miss or have a late monthly payment for the first time.
• No extra fees: Along with zero-percent APRs for the first six months, some credit cards don’t charge students for using their cards in other countries. This feature is nice for students interested in studying or traveling abroad.
• A report to all three credit bureaus: Student credit cards should report to all three major credit bureaus. It’s important for TransUnion, Equifax, and Experian to have records of your credit history because they use that information to calculate your credit score. Your credit score will be used to evaluated your credit worthiness for loans and more.^[1]

Risks and Rewards of Credit

Credit cards can give students new opportunities, but owning them is also a big responsibility. Students should consider the advantages and disadvantages of credit before choosing the best plan.

Credit Pros

• Secure and convenient method of making purchases: When you carry cash, you have the potential of having the money lost or stolen. A credit card or debit card, on the other hand, can be canceled and replaced at no cost to you.
• Greater consumer protections than debit cards: These consumer protections are written into law, and with credit cards you have a maximum liability of $50. With a debit card, you are responsible for transfers made up until the point you report the card stolen. In order to have the same protections as with credit cards, you need to report the card lost or stolen within forty-eight hours. The longer you wait to report the loss of the card, or the longer it takes you to realize you lost your card, the more money you may be responsible for, up to an unlimited amount.^[2]
• Building credit: If you pay off your monthly credit card every month on time, you will start building credit and have a good credit score early on. Your credit score can be an important factor later on if you decide to open another account or take out a loan. Some employers may even want to see your credit history. While most people associate a credit score with getting better rates on loans, credit scores are also important to getting a job, lowering car insurance rates, and finding an apartment.^[3]

Credit Cons

• Overspending: If something is out of sight, it may be out of mind and the same can be true of money. Sometimes people overspend with credit cards because it’s easy to think that you have more money than you really do.
• Interest: Credit card companies with student deals still typically include some level of APR or interest rate. If you don’t pay off the entire balance every month, using a credit card can be expensive. Suppose you decide to use your credit card to pay for $1,000 in school supplies and books. Credit Card 1 has an APR of ten percent, and Credit Card 2 has an APR of twenty-four percent. If it takes you a year to pay off the $1,000, you’d actually pay a total of $1,055.04 with Credit Card 1 and $1,134.72 with Credit Card 2—that’s $55 for the first card or $135 for the second card on top of the original $1,000 you charged. This example highlights the importance of making sure you pay off the balance as soon as possible AND choosing a credit card with a lower interest rate.
• Debt: Unlike debit cards, credit cards allow users to borrow money that they can pay back at a later date. While this allowance can be useful in emergency situations, you may end up charging more than you can afford to pay back right way, and you may find yourself saddled with debt. Carrying a lot of debt can damage your credit history and credit score.

The Danger of Debt

When you take out a loan, you take on an obligation to pay the money back, with interest, through a monthly payment. You will take this debt with you when you apply for auto loans or home loans, when you enter into a marriage, when you buy a home, and so on. Effectively, you have committed your future income to the loan. While student loans can be a good idea, if you take on too many loans, your future self will be poor no matter how much money you make. To make it worse, you’ll be transferring more and more of your money to the bank through interest payments.