If you look up the term “credit card” in the dictionary, the definition would probably read, “Scary, detrimental pieces of plastic that came from the devil himself,” right? In today’s society, credit cards have acquired an extremely bad rep. Don’t get me wrong, credit cards have become a major issue and have put a lot of people in a bind, BUT they can helpful and be very beneficial to your financial soundness.
I’m here to explain what a credit card does, what a credit score is and which types of cards you should apply for. As college students, we all probably have some type of debit/credit card tied to our bank accounts. These types of cards do not build a credit score or a line of credit, which are things you will need later in life for bigger purchases like cars and houses.
Basics of a Credit Card
A credit card can have many features and requirements, but the main ones to focus on are as followed:
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Annual fee: an amount charged once a year just for having the card
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Credit limit: how much money can be charged to the card
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APR (annual percentage rate): price paid, typically on an annual basis, for borrowing money/an interest rate for when bills are not paid
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Late payment fee: a varying fee that depends on the card’s stipulations for a missed payment
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Fraud protection: like insurance for your account in case of breaches, stolen card information, etc.
These basics are the major ones to know before applying for a credit card. Some cards, a lot of student cards, in fact, have a $0 annual fee. An APR charge can be avoided if you pay all of your bills in full each month. Same goes with the late payment fee. If you stay on top of paying back the money you charged to your card, these fees and rates will not be tacked onto your payment at the end of the year.
Credit Score Explained
We all know the commercials and jingles associated with sites that “check your credit score for free.” Well, first thing first. There is only one site, authorized by federal law, that you can check your credit score for free. You can get one report from each of the three main credit bureaus once a year. The three main credit bureaus are Experian, TransUnion and Equifax, and they can be explained more thoroughly here.
Okay, so what exactly is a credit score. Your credit score shows lenders how likely you are to pay back the money you borrowed. Think of it like your classes: homework, quizzes, projects and tests are all weighted differently, all contributing to your final grade. The same goes with a credit score. FICO was the first corporation to make the formula and break down credit scores based on the following:
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Payment history: 35%
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Total amount of debt: 30%
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Duration (how long you have had an account): 15%
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New credit (how many accounts you have or have applied for): 10%
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Types of credit (quality of accounts): 10%
Your credit score is like a track record. Late payments can stay on your record for up to 7 years. Cards from national banks hold more quality and credibility than cards from department stores. A higher credit score means you get lower interest rates, resulting in small fees if you don’t pay on time, etc.
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Finding and Applying for Your Card
If you do it right, your credit card can help you more than hurt you. Credit cards only hurt you when you overspend, don’t pay your bills and are just overall irresponsible with it. There are thousands of credit card options out there, and the best one depends on the person.
There are cards for beginners with no credit history, students, travel, gas, everyday purchases and the list goes on and on and on. Find a card that works in your favor, whether that be cash back perks or traveler miles to redeem for free trips.
Just know that when applying to any card, companies will ask for your minimum income, age, residential status, credit history (if any), documents of income information and a government issued ID.
Any other questions you may have can probably be answered here. Don’t be scared to ask questions and know exactly what you are getting into. Ask your parents, professors, or other adults for advice or for answers to any questions you may have.
Once you come out of college, having a good credit standing and history can put you ahead of the game. Use the card only to charge your utilities or groceries and immediately pay it off. Always remember, just because it’s not linked to your bank account, does not mean that you won’t have to pay for it. As college students, we’re good at procrastinating, but for your own sake, don’t include procrastinating bills in that talent.