Credit cards, across all ages, are always a double-edged sword. Like most things, when abused, credit cards can become one’s worst nightmare, with consequences of your negligence hounding you sometimes for the rest of your life. On the other hand, it will allow you to start building credit as you establish a credit history early on. This is beneficial when, later on, you are ready to rent or buy your own apartment or apply for a loan that will help you build your life up.
With college comes an exciting journey of new independence and self-sufficiency. Part of this independence is to be responsible for your own financial decisions. It is easy to get caught up with the convenience of getting what you want by just swiping some cards, but keeping track of your credit card usage is just as critical as keeping your college grades up.
So, is it practical to sign up for this big of a responsibility this early in your adult life?
The short answer is yes – but with reservations. If you are confident that you can commit to using your credit card responsibly, then you will have a lot to gain from using a credit card for your daily transactions. Remember, a credit card is not free money and should never be treated as such.
It is important that you choose your first credit card that offers favorable terms and benefits for student users like you. To help you understand these terms better, there are some terms that you need to be familiar with:
- APR (Annual Percentage Rate): This is the interest rate applied to your outstanding balance if you do not pay it off in full each month.
- Credit Limit: The maximum total you can charge on your credit card.
- Minimum Payment: The smallest amount you must pay each month to keep your account in good standing.
Here’s a comprehensive list of credit card terms you can use as a reference: https://www.cnbc.com/select/common-credit-card-terms/
Since you are reading this, you are most likely a student already interested in getting a credit card. This means you already know or are at least aware of the benefits it comes with. So, let us discuss the risks and drawbacks instead to help you make an informed decision.
The Risk of Growing a Debt
Sometimes, no matter how careful you are, things always slip through, and a one-time big purchase can crumble the safeguards. It is easy to be tempted to overspend with that seemingly unlimited purchase power and just lose track of all those expenses. The option for a minimum payment also creates an illusion that you are still on top of your debt balance.
High-Interest Rates and Other Fees
Depending on the credit card that you choose, you could get trapped with high interest rates, especially when you keep paying just the minimum amount month-to-month. Additional costs, such as annual fees, overdue payment fees, and cash advance fees, can add up quickly without you even noticing.
Negative Impact on Credit Score
Because of the debt potentially accumulating, you are likely to ruin your credit score with just a student credit card. And that early in the financial game, you are likely to face several difficulties in finding financial assistance for life milestones.
There are several reasons your credit score could get ruined. Past-due payments are the biggest factor – records of later payment stays on your credit report and make an impact on your score for seven whole years. Your credit score also depresses the total debt you have in relation to your credit line.
Learn more about the credit utilization ratio and how it affects your credit score.
Other than the possible risks, another consideration you should explore is choosing the student credit card that is right for you. Here are some steps you can follow to get you to that desirable but suitable rectangular plastic card.
Do your due diligence and research.
If you are only starting to get interested in credit cards, do extensive research on the internet about the complexities of credit cards. Find the several types you can choose, the expert professionals you can consult, and, ultimately, the path you can take to get you to the right option.
When comparing different credit card options, take into careful consideration the card’s annual percentage rate, cashback, rewards, or other perks it offers. While most student credit cards have low credit limits, they also have zero annual fees. They also come with manageable terms designed for students, and even the perks are mostly student friendly.
Carefully read and understand the Terms and Conditions
Before signing off on that application form, remember to review the often-overlooked terms and conditions thoroughly. It is where you find out how the different interests are calculated, what fees apply, and the consequences of past-due payments.
Once you find and get approved for the card that is right for you, you must incorporate responsible credit card practices into your daily life. This is a good practice for when you make bigger financial decisions in the future with much greater steaks.
Setting a Budget and Making a Monthly Spending Plan
This is a crucial point in your life to start learning about creating a monthly spending plan and sticking to it. A monthly spending plan usually consists of your fixed expenses, daily and variable expenses, as well as non-essential expenses, including entertainment, shopping, or dining out. Having and following the spending plan will give you less probability of sacrificing your savings just to get out of an unnecessary debt.
Paying Bills Before the Due Date
A responsible use of credit cards means making prompt payments to your monthly statement balance. With the help of your spending plan, set up automatic payments on or before the bill’s due date and make sure that your account has enough money to fund it. Paying Bills over the due date also helps with your planning on how to properly schedule due dates for other bills, including phone, internet, etc.
Avoiding the Minimum Payment Trap
Even if it seems like a viable option to take every month, you have to understand that paying a small percentage of your outstanding balance is not a sustainable financial strategy in the long term. Paying the minimum only adds to your debt and actual cost, as you will be paying higher interest charges, which enhances the risk of accumulated debt.
Tracking your Spending through Statements
It is important to comb your statements for any errors, unauthorized charges, or other fraudulent activities. This allows you to call your credit card issuer within the required timeline to report any discrepancies. Monitoring your credit card statements not only ensures that your card remains safe from fraud, which is especially important, but it also provides an analysis of spending activity. Knowing the trend of how you spend your money gives you an insight into where you can improve.
While the most critical factor to consider, committing to these practices is not enough to get you out of the risk of sudden overwhelming debt. Sometimes, uncontrollable factors come into play, and the better prepared you are, the more protected you will be.
The most common threat to credit cards is for it to be stolen or lost. The best thing you can do is always to keep it in a secure place only you know. Avoid letting other people, even family, borrow and use it without your presence, and do not ever give your card details to anyone you do not fully trust.
Tips for When Your Card Gets Lost or Stolen
In the event that you cannot find your card, report it immediately to your issuer to prevent it from any unauthorized use. Ask them to close your account as soon as possible and monitor your following statement for any charges you do not recognize.
Tips for Recognizing Fraudulent Activities
The reason why credit card details must always be kept confidential is that the more people know about it, even those you trust, the more chances of it being exposed to risky sites. Fraudulent activities almost always come from online shopping, so be sure to keep all your accounts on various platforms safe and updated. Avoid logging on to your credit card account or making any online purchases through public Wi-Fi, and always be wary of phishing and skimming scams. Delete any messages or emails from unrecognized sources, and never ever loosely click on links you do not recognize.
Getting a credit card is a remarkable step to achieving that sense of independence. Do not think irresponsibility and impulsive buying ruin it. While it is always good to start building your credit early on, you must first assess if you are mentally ready for such a big responsibility. Remember, credit cards are just one step but a critical foundation for your financial future. Continue to grow your financial literacy by educating yourself about current trends in personal finance and efficient strategies for budgeting wisely.