Credit Cards

Building credit during college is important, but there are potential pitfalls. Before applying for a credit card, it is important to assess your level of responsibility and financial means. The credit decisions you make during college will affect your financial future.

Advantages of Credit Cards

Building credit: Making small purchases and paying them off every month will reflect positively on your credit report and credit score.
Learning fiscal responsibility: Living on a limited income is not easy, but learning to control your spending is a habit that will carry on for the remainder of your life.
A resource for emergencies: When emergencies occur (e.g., car repairs or additional textbooks), a credit card can help students cover unexpected expenses. When using a credit card for emergencies, have a repayment plan and stick to it!

‌Pitfalls of Credit Cards

Avoiding fiscal responsibility: Students who don’t have a solid understanding about credit cards often run up large amounts of debt that is difficult, if not impossible, to repay as a college student.
Damaging credit history: If a student does not use a credit card responsibly (e.g., missing payments, carrying large balances, etc.), these negative marks will appear on a credit report and affect credit scores. Damaging your credit while in college will make it difficult to be approved for a car loan, rent an apartment, and possibly obtain employment after college. If students do not feel they are ready for a credit card, it is much easier to establish credit after college than to fix credit after irresponsible usage during college.
A resource for luxuries: Students often mistake wants for needs, especially when a credit card is available. Credit cards make it easy for students to live beyond their means while in college, which negatively impacts them in the future.

Key Terms and Definitions

Annual Fee: yearly fee charged by some credit card issuers for processing and maintaining your credit card account.
Annual Percentage Rate (APR): yearly interest rate you pay on your balance. Interest rates will vary based on your credit worthiness and the lender.
Cash Advance: cash withdrawal from a credit line, finance charges accruing immediately
Credit Limit: maximum amount that can be borrowed on one line of credit
Introductory APR: initial interest rate for some credit cards; the interest rate will increase after a period of time
Minimum Monthly Payment: minimum amount due each month to avoid late fees, penalty fees, and negative marks on a credit report. By paying only the minimum, the balance will take longer to pay off and more interest will accrue.
Penalty APR: a higher interest rate, which typically begins when a payment is late, missed, or returned. Usually, the borrower is required to make six consecutive payments on time before the interest rate returns to the original interest rate.
Penalty Fees: fee charged to your account for a variety of reasons, including late payment, missed payment, and going over the credit limit.
Variable APR: interest rate changes as the prime rate changes, causing the APR to increase or decrease.

What to Keep in Mind When Using a Credit Card

Make sure you understand the terms and conditions (e.g., interest rate, late fees, rewards, etc.) before applying for a credit card.
Of all types of credit, credit cards have the highest interest rate.
Do not put more on your credit card than what you can pay off at the end of the month. By paying off the entire balance each month, you will avoid interest charges.
If you are unable to pay off the entire balance, at least make the minimum payment. Pay as much as possible to save on unnecessary interest charges.
Be mindful of wants and needs. Credit cards should not be used to extend your spending limits on wants.
If you only want a credit card for emergencies, define what an emergency is before using the credit card.

Resources

NerdWallet

Consumer Financial Protection Bureau