• Learn about credit card ownership and its risks and benefits
• Learn what a credit score is, what impacts a credit score, and how it reflects a person’s creditworthiness
• Understand what is include in a credit report

Getting and Using a Credit Card

One of the most controversial aspects of personal finance is the use of credit cards. While credit cards can be an incredibly useful tool, their high interest rates, combined with how easily credit cards can bury you in debt, make them extremely dangerous if not managed correctly.

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.  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 zero-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 zero-percent APRs for the first six months, some credit cards don’t charge students for using their cards in other countries. This feature is nice for students interested in studying or traveling abroad.
• A report to all three credit bureaus: Student credit cards should report to all three major credit bureaus. It’s important for TransUnion, Equifax, and Experian to have records of your credit history because they use that information to calculate your credit score. Your credit score will be used to evaluate your credit worthiness for loans and more.^[1]

How to Use a Credit Card

All the benefits of credit cards are destroyed if you carry credit card debt. Credit cards should be used as a method of paying for things you can afford, meaning you should only use a credit card if the money is already sitting in your bank account and is budgeted for the item you are buying. If you use credit cards as a loan, you are losing the game.

Every month, you should pay your credit card off in full, meaning you will be bringing the loan amount down to zero dollars. If your statement says you charged $432.56 that month, make sure you can pay off all $432.56. If you pay off your bill in full every month, you won’t ever pay any interest on the credit card.

But what happens if you don’t pay your bill off in full?

If you do not pay your statement balance in full, you must pay daily interest on the entire amount from the date you made the purchases. Your credit card company, of course, will be perfectly happy for you to make smaller payments—that’s how they make money. It is not uncommon for people to pay twice as much as the amount purchased and take years to pay off a credit card when they only pay the minimum payment each month.

When looking at your credit card balance, you may see two different balances shown – the statement balance and the outstanding balance. It is important to understand the difference between these two numbers.

statement versus outstanding balance

A credit card statement balance is the amount of money that you owe on your credit card at the end of a billing cycle. This balance includes all of the purchases, cash advances, balance transfers, and fees that were charged to your card during that billing period, minus any payments or credits that were applied to your account.

 

The outstanding balance of a credit card is the total amount of money that you currently owe on your credit card account. This includes the statement balance plus any new purchases, cash advances, balance transfers, and fees that have been charged to your card since the last billing cycle.

What to Look for in Your Initial Credit Card

1. Find a Low-Rate Credit Card: Even though you plan to never pay interest, mistakes will happen, and you don’t want to be paying high interest while you fix a misstep. Start by narrowing the hundreds of card options to the few with the lowest APR (annual percentage rate). However, be mindful of introductory offers of low APR, as those are likely to change to much higher APR rates after the introductory period is over.

2. Avoid Cards with Annual Fees or Minimum Usage Requirements: Your first credit card should ideally be one you can keep forever, but that’s expensive to do if they charge you an annual fee or have other requirements just for having the card. There are many options that won’t require you to spend a minimum amount each month and won’t charge you an annual fee.

3. Keep the Credit Limit Equal to Two Weeks’ Take-Home Pay: Even though you want to pay your credit card off in full, most people will max out their credit cards once or twice while they are building their good financial habits. If this happens to you, having a small credit limit makes that mistake a small mistake instead of a [latex]$5,000[/latex] mistake.

4. Avoid Rewards Cards: Rewards systems with credit cards are designed by experts to get you to spend more money and pay more interest than you otherwise would. Until you build a strong habit of paying off your card in full each month, don’t step into their trap.

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