With my first job came my first debit card at 16, and it was a big deal. Instead of buying McDonald’s once a month with whatever leftover birthday money I could scrounge up, I could buy McDonald’s once a week with metaphysical money! It taught me how to save, and keep track of my spending and income, but now, as a college student, I have to deal with the next step of managing money: credit cards.
What's the difference?
Credit cards are different from debit cards because debit cards only allow you to spend money you currently have. With a debit card, if my account says $70, I can spend $70. If I need more money, I have to wait until my next paycheck. With a credit card, I’m essentially able to take out a temporary loan that I’m prepared to be held accountable for, granting me access to more money. If my account says $70, I can spend $100 if I’m confident I’ll be able to scrape together an extra $30 by my next payment due date.
Having a credit card and consistently paying the bill is a huge responsibility. On one hand, having access to more money can help you make bigger purchases, or take some of the burden off of your weekly expenses. On the other hand, failing to make payments has consequences that can take a lifetime to make up for.
What is a credit score, and why is it important?
Banks and other institutions require a credit history when applying for a credit card or a loan, so if you plan on buying a car in the near future, you’re going to need a credit history. Your credit score tells lenders how reliable you are, and typically falls within the range of 300-850. Generally, the smaller your debts, and the faster you pay them off, the better your score is.
This score indicates how likely you are to pay it back if you ask the bank for a loan and, the further back your history goes, the better you look.
If you’re going to apply for a credit card, make sure you go in knowing how you’re going to prove that you can pay for it without a credit history. Without any credit history, this will probably require you to provide proof of income or to have a cosigner–somebody who does have good credit that can vouch for you, like a parent. If you default on your loan, your cosigner is legally responsible to pay it for–so they also need to have a decent credit score and history.
Keep in mind that getting rejected for a credit card application will actually hurt your credit score, starting a whole cycle of you being unable to get a loan because you don’t have credit because your application got rejected. So the question stands: is now the right time for you to open one?
1. Using a credit card should help you build your credit
Sophomore Maria Lopez got her first credit card over a year ago, and the main driving force in this decision was planning for her future. “I needed to build credit so I could get started on getting a credit profile for stuff like cars, houses, and insurance,” she says.
But just having a credit card alone doesn’t help your credit score. You have to actively use it, and make your payments in full on a monthly basis. As long as you do, your credit score should rise (though if you have unpaid medical debts or debts in collections, those could prevent your score from increasing, even if you're being responsible with your card). Just make sure that you're only spending what you know you can afford.
One way to stay on top of that is to treat your credit card like your debit card–don't make the purchase on credit if you wouldn't make it without it. Pay your credit card down each time you make a purchase, so you don't forget to pay it before the due date. Or, create a budgeting spreadsheet so you can track how much is in your checking and savings accounts versus how much you're charging.
2. But, you risk driving your debt up
Your score will dip when you apply to open your new credit card, and it'll drop if you fail to pay the full amount owed each month. When you open your new card, one of the biggest factors to look into will be the card's annual percentage rate. The APR is the interest you're charged over a full year, so if your card has a 24% APR, you'll be charged 2% on any owed amount you allow to roll over each month. Some credit cards also charge additional fees if you don't pay a minimum amount each month.
If you're not paying your full amount each month, credit card debt can build up fast, especially with a high APR. You probably already owe thousands of dollars to your university, government, or private institutions, so it’s important to do the math and figure out if you can afford to pay off a credit card on top of that. Choosing a low-limit credit card and finding the lowest APR you can is the first step if you're nervous about rollover.
3. They’re good to have in emergencies
This world ain’t cheap, especially for college students.
Credit cards can be a great fix for buying things you need now but won’t be able to afford until your next paycheck comes in, like medicine, car repairs or groceries, but emergencies happen. Expect the unexpected, and plan ahead where you can. Cut out your daily Starbucks or your weekly Chinese takeout and put that money into savings, instead.
When expenses come knocking, discuss payment plan options with hospitals or mechanics spread out over a longer amount of time, or see if they'll decrease your bill if you pay in full. And remember, it's stressful to have your monthly credit card bill roll over, but in an emergency, it could save you.
4. The right credit card comes with perks
Credit card commercials love to talk about their “special perks,” then throw out a bunch of buzzwords like I’m supposed to know what cash back is. No, high school did not teach these things. But I can!
Cash back is when a company returns a portion of what you spent at a particular location. For example, your credit card might give you 2% cash back when you fill up on gas from Shell, usually redeemable to apply to your credit card bill or transfer to your savings. Other cards may give you points, which can usually be redeemed for anything from gas cards to restaurant vouchers and, in some cases, actual cash.
You might be more interested in flight miles if you’re from Oregon but going to school in New York. Airline credit cards give you a certain number of points for every dollar you spend on flights and, sometimes, other expenses, too. Once you rack up enough points you can cash them in for future flights. If this appeals to you, check the options your preferred airline offers. You may be flying a lot, but probably aren't earning pointss if you’re booking a Delta flight with your Southwest card, so choose carefully.
5. There are some great options for student deals on credit cards
If you’ve absorbed all this information and decided that a credit card is right for you at this time, you also have to consider the pros and cons of different companies and plans. Cards for college students specifically lend money to people without a credit history or credit score. However, they usually have higher APRs that could quickly bomb your new credit score if you aren’t careful. Non-student credit cards usually charge 14-16% APR, but these numbers can vary by lenders, and you'll likely need to have some sort of credit history to qualify for these.
Ultimately, almost no adult can get away with never having a credit card. They make it easier to buy a house, get a car and even pay for your own future child’s college, but they can also be dangerous if you don't use them smartly. Take adulthood one step at a time. Navigating credit cards is hard, but would be a lot harder without a job, possible cosigner, or plan to manage existing debt. The time might not be right for you just yet, but only you can decide.