Credit Cards 101: What You Need to Know

“When I was 7 most of my friends stopped believing in magic. That's when I first started. They were beautiful, they were happy. They didn't even need any money. They had magic cards.”—Rebecca Bloomwood, Confessions of Shopaholic

Ah, magic cards. Without them, how would some of us ever keep up our collections of Tory Burch flats and American Apparel V-necks while splurging for spring break in Cancun? Money is scarce when you’re a student, even for top-notch bargain hunters. But before you sign up from the first credit card rep you see (they have a tendency to hang out on campuses), HC’s here to make sure you know the facts, and we’ve talked with Cara Newman, editor of Young Money magazine. Because we really don’t want Derek Smeath to chase you around Manhattan and then embarrass you in front of your super-hot boyfriend/boss while you’re on national TV. And we’re pretty sure you don’t want that either.

What is a Credit Card?

While a credit card and a debit card may look exactly the same, they’re completely different. When you swipe a debit card, money is immediately removed from your bank account. When you swipe a credit card, you don’t pay anything at all right away. Instead, your purchase gets added to a bill that you don’t pay until the end of the month. Credit cards can be a wonderful blessing. If say, you know you’re getting your paycheck tomorrow, but your favorite store’s one-day-only sale is today. Or if you’re in an emergency situation, like you get stranded somewhere and need to pay for a taxi (fashion emergencies don’t count). But they can also be a curse. If you can pay your bill, you’re fine. But if you don’t pay off the whole thing, you’re essentially taking out a high interest loan on the money for whatever you bought. For students, the average monthly interest rate on a credit card is 15.82%. That means that if you owe $100 on your credit card statement and you can’t pay it off the first month, then you actually have to pay $115.82! And if you can’t afford to pay your initial payment plus the interest the next month, you’ll be stuck paying interest on your interest the next month! And the cycle will continue until you can pay everything off… Unfortunately, that’s the story for many college students who use credit cards. According to Forbes magazine, 83% of us don’t pay off our credit cards, and on average, we have 4.6 cards and are $3,173 in debt. That’s not exactly a great track record, so be careful.

New Credit Card Regulations

In light of the recent fiscal crisis, and because of our wonderful spending skills, Congress recently passed a Credit Card Act that requires a parent to cosign on any credit card taken out by an under-21. If you’re in that category, the new rule means that your parents will need to agree with your decision to get a card and agree that they’ll pay off your debt if you can’t. So any credit card decisions you make are basically at their mercy.

Where to Get a Credit Card

Because most major credit card companies require a large credit history, you’re going to need to start with a student credit card or a store credit card. Because store credit cards usually have really high interest rates, a student one is a better bet unless you’re absolutely sure you’re going to pay it off every month. When choosing a card, look for one with low fees and a low APR or interest rate (APR and interest rates are the same thing, but an APR is yearly and an interest rate is usually monthly). “I think the really important thing to look at is the fees,” says Cara Newman, editor of Young Money magazine. “Make sure you don’t have hidden fees and crazy fees and all sorts of things like that. Really read the fine print.” Luckily, the new credit card regulations are requiring credit card companies to disclose more information about their cards, so it should be easier to sort out what’s a scam and what’s not. If you’re confused by anything in the fine print, try checking out learnvest.com, which has lots of easy to understand financial information. Alternatively, a friendly finance or economics major might be able to help you out! Also, make sure your credit card company will submit your credit history to the credit bureau, or else you’ll be missing out on what can be one of the greatest advantages of having a credit card: developing a credit score and credit history.

Credit Scores and Credit History
When you’re applying for loans, mortgages, or other credit cards, banks and companies will check your credit score (also called a FICO score) and your credit history. Your credit history is a record of all the times you’ve borrowed money, and whether or not you’ve paid it back. Your credit score is a number between 300 and 850 that’s calculated from your credit history. Credit scores are pretty simple conceptually. Higher scores are better and lower scores are worse. Paying your bills on time helps your credit score go up, and paying them late or not at all makes your credit score go down. But even if the concept is simple, actually keeping your score high can be difficult if you’re not careful. “You can build credit easily and quickly, but once you get bad credit, it’ll take a while to get it back,” says Newman. “If you don’t have the money to pay for what you’re buying, you can end up in trouble.” Since you need a credit card to develop a credit history, and you need a credit history to get a better credit card, loan, or mortgage, it’s actually a good idea to get your credit card while you’re still in school. Right now, you can get a student credit card, but once you graduate, no one will give you a card without a credit history. But just because getting a credit card is often a good idea, remember that charging everything in sight ISN’T. You’ll just ruin your credit score, which completely defeats the purpose of getting a credit card. Exercise self-restraint. Because you don’t want to learn the hard way that green scarves aren’t actually begging you to buy them.

Sources:
Cara Newman, Editor of Young Money magazine http://www.myfico.com/CreditEducation/CreditScores.aspx http://www.forbes.com/2010/02/04/college-credit-cards-personal-finance-c... www.learnvest.com

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