Procrastination is like a credit card: it's a lot of fun until you get the bill.
—Christopher Parker, actor
By the end of this section, you will be able to:
Describe the opportunities, risks, and rewards of owning a credit card
Define credit history and identify resources for assistance with credit issues
Credit Card Opportunities
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 0 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 0 percent APRs for the first six months, some credit cards don’t charge students for using their cards in other countries. This is a nice feature for students interested in studying or traveling abroad.
Rewards for good grades: Some companies offer credit card agreements that reward students for excelling academically. For example, you may receive cash back every year if you maintain a certain grade-point average.
Effective customer service: Credit card companies that have positive customer service reviews often provide extra support in answering questions from new customers. Some companies also have tools for their customers’ online accounts that help them pinpoint their spending and payment habits.
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.
Saving money: Credit cards can be connected to checking accounts so that companies know where their customers’ money is coming from and they have an account to charge interest rates to. The account can help students practice saving money rather than needing to having a lot of cash on hand. This can make it easier for students to make large payments for things like tuition and unexpected expenses like vehicle maintenance or medical bills.
Receiving benefits: In addition to cash back for good grades, credit card companies may offer other benefits such as store discounts, gas rewards, and points toward air travel.
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.
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 10 percent, and credit card 2 has an APR of 24 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 or $135 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 choose 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 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 score.
Using Credit Responsibly
Credit History and Credit Reports
You begin to establish a credit history as soon as you get your first credit card or get a loan. Your credit history includes information about the number of credit cards and loans you have and how conscientious you are about paying your bills. Three companies, TransUnion, Equifax, and Experian, collect this information and use it to create a credit report, which functions as a summary of your credit history. By law, you’re entitled to one free credit report each year from Annual Credit Report. Although you have to pay extra for your credit score to be included with your credit report, a lot of people use this as a quick reference to gauge how good or bad someone’s credit is. Different companies use slightly different ratings, but 300 or so is considered to be a low credit score, and 700–850 is considered to be high.
It's a good idea to sign up for a free credit report from the Annual Credit Report, since other companies will charge to give you your credit history and score. The best thing is to keep track of your bills and pay them in a timely manner so you don’t have to worry about whether your credit is good or not. Potential landlords, banks, loan companies, car dealers, and even employers will often ask for your name and social security number so that they can obtain your credit information. Every business is different, but many use credit scores to evaluate prospective customers and decide how responsible or risky they might be.
The following video shows how your credit score is determined and some rules of the road for improving your current credit rating.
Resources for Credit Issues
Maintaining credit is a big responsibility, and sometimes it can be challenging. For example, you might have to borrow more student loans than you want because you don't have time to work while attending school, or it might be difficult to find a decent-paying job as a student or recent graduate. These are just a couple of issues that could threaten your credit. Repairing bad credit can take a long time—up to seven years—so it's important to take action as soon as you're having trouble paying bills or overspending. Different resources and options are available to help you deal with credit issues, including the following:
Loan consolidation: Students may consider having multiple loans consolidated with the federal government so they have to make only one loan payment per month. While this may give you more time pay off student loan debt, it may not be the best option, since the one monthly payment can cost more and accrue a higher interest rate. Students should talk to loan company representatives and financial aid resources at their institution to discuss other payment options, such as income-based payments in which the amount you pay each month is based on your income level.
Credit counselors: Credit counselors are trained to help people develop personal budgets and to provide classes on savings and debt solutions. They may also offer debt management plans in which they work with your credit card and loan companies to arrange a deal and ask you for monthly deposits so that they can help you pay off your debts. If you are interested in a consultation from a credit counselor, you should ask family, friends, or your local government for references for reputable ones. You will also want to find counselors that do not charge customers too much for their services to avoid additional debt.
Debt settlement plans: Debt collection companies will offer services to their clients that involve talking to credit card and loan companies and coming up with a plan to pay a lump sum instead of the total debt owed. Similar to finding credit counselors, you should contact local government offices to find reputable debt collection companies so you can avoid overpayments and scams.
Bankruptcy: Bankruptcy is an official status that is obtained through court procedures, and it means that means you are unable to pay off your debts. People may file for Chapter 13 bankruptcy, which means they don't lose any assets and have a payment plan of three–five years to pay off their debts, or Chapter 7 bankruptcy, which means they may have to surrender assets that can be used to pay off their debts. Bankruptcy damages your credit score, and the fees for filing paperwork and hiring an attorney can be costly, so it is important to consider other financial solutions first.
Credit counselors might be able to recommend budgeting and credit courses that will give you tips for managing your personal finances
Check Your Understanding
Answer the question(s) below to see how well you understand the topics covered in the previous section. This short quiz does not count toward your grade in the class, and you can retake it an unlimited number of times.
Use this quiz to check your understanding and decide whether to (1) study the previous section further or (2) move on to the next section.