Who doesn’t like free stuff? Many credit card companies will offer new students a variety of “free stuff” to sign up for a credit card. There are many opinions about credit cards: some people say you should only use them in an emergency and some people buy too much and go into debt. Below, I’ve included lessons you’ll need to make sure you know how to use a credit card to benefit you.
A credit card is a monthly loan from a bank. On my first secured credit card, I had a limit of $1,000. That means that every month, my bank would pay for my card purchases up to $1,000. You can get cash advances up to a certain percentage (if needed, but there are usually fees). You are responsible for eventually paying for the costs on the card. Every month you’ll receive a statement of your purchases. You’ll need to pay the “minimum payment,” but you should pay the full amount.
Minimum payments are a scheme. This 1:19 video will quickly outline an example of what happens when you don’t pay off your full balance. Basically, a credit card has an Annual Percentage Rate (APR) that is applied to any balance that’s carried over month to month. If you pay off your bill when it’s due, you will not have any interest added to your bill. For example, my credit card bill cycle runs from the 23rd of each month to the next. I have until the July 18th to pay off my bill that covers my purchases from May 23 through June 23. If I pay the bill off any time between June 23 and July 18, I won’t have any added interest. If I paid off my entire bill before June 23, my credit score wouldn’t budge because it wouldn’t look like I’m using any credit.
You shouldn’t freeze your credit card in a block of ice. Maybe such drastic measures would work if you’re already in debt, but if you’re just starting your credit history then this isn’t great advice. For example, say you have three people who would like to borrow $10. The first person is your close friend, but you know she never pays you back even though you’ve spotted her before. The second person is your close friend who always pays you back. The third person is a total stranger that you’ve never met. In this case you’d probably loan money to your friend who will pay you back. In the eyes of a credit card company, people who never use their card (or pay it all off before the bill is due) can seem like a total stranger. If the credit card company don’t know your spending habits, how can they know you’ll reliably pay them back? If you consistently use your credit card for reasonable expenses, your credit score will shoot up much faster than if you never use your card.
Keep track of credit utilization. This is the percentage of available credit you’re using across all credit cards. I’ve heard from multiple financial advisors and bank reps that a 30 percent utilization rate (using only $300 of my $1,000 limit) is a good cap. I prefer to hover around 10% if I can. But in an ideal world, you shouldn’t go above 30 percent.
Get organized. Missing even one payment can do significant damage. Other than your entire balance being subject to your interest rate, you’re also hit with a $25 or $35 late fee. Your credit score will also take a hit. So remind yourself to pay your bill, whether that’s a calendar date, phone alarm or something else. Some credit cards can notify you when you’ve used the card. Keep track and make sure you aren’t going over your preferred credit utilization limit.
Start now. Credit history accounts for 35 percent of your credit score, so getting a credit card your first year in college and keeping it for years will help you have a higher credit by the time you graduate. You can use the above lessons and others to keep yourself on the positive side of credit and to avoid having debt.
Personally, I spoke with a bank representative to talk me through how to responsibly use a credit card. If you can, I suggest you request a free appointment with them. Please let me know in the comments if you have any other questions or advice about spending!
Hi, I'm Riley! I graduated from college in December 2016, after working to earn over $100,000 in scholarships and aid.