Are you ready to pay with plastic? When used responsibly, credit cards can be a great tool to establish credit — and good credit is something that will serve you throughout life. That’s why so many college students, recent graduates, and newly independent adults are ditching the cash and going plastic.
Fair warning: there’s a catch. Responsible credit card management is crucial, and can mean the difference between a competitive edge and financial ruin. Sound overly dramatic? Hardly. The stakes are high. Still, with a little planning and attention, you can make credit cards work for you. Let’s review some tips for using a credit card for good.
Why Get a Credit Card?
You’ve had a lot of report cards in your life. But there’s one critical report card that has nothing to do with your GPA. Your credit score is a financial report card, and it plays a big role in your ability to do everything from landing a job to securing an apartment or a car loan. A credit score can go up and down based on your actions, but it follows you through life. In order to have a strong credit score, you need to build credit.
So how are you supposed to build credit if you’ve never purchased a home or a car? For many young adults, that’s where credit cards come in. In fact, more than one third of current college students have credit cards in their name. After all, it makes sense to tack on some financial lessons along with all the other lessons students learn in college. It’s a big advantage to be able to cross the stage at graduation knowing you’ve already begun to build strong credit.
And if you’re starting a bit later? No worries. Now is as good a time as any to get on the (responsible) credit card superhighway. But don’t delay; it only gets more difficult to build credit as you get older, and lenders will look to your credit history when deciding whether or not to give you credit.
The Credit Card Pitfalls
Before you frantically start filling out all those “pre-approved” offers flooding your mailbox, take a step back. It’s important to understand the dangers of credit cards. They’re easy to misuse, and the potential snowball effect is scary.
Recent studies show that young adults are increasingly prone to credit card debt, which is a whole different animal than credit card use. The recession caused everyone to lean more heavily on credit — followed by debt — and students weren’t exempt. Undergraduates began to carry record-high credit card balances, with seniors carrying an average of $4,100 in credit card debt. Keep in mind, that’s just credit card debt; student loans are entirely outside the equation.
Avoiding the Pitfalls
None of this is intended to scare you away from credit cards, but it’s worth learning how to use them wisely; it’s up to you to take charge of your credit future.
Here are some insider tips:
- Don’t be fooled by good introductory interest rates.
- That snazzy 0% interest rate almost certainly has an end date. With interest rates frequently soaring into the 30% range, that $7 burger could end up costing as much as a choice steak by the time you pay off your debt. Look for low interest credit cards with rates that extend beyond introductory offers.
- Try to pay off your balance each month.
- This goes hand-in-hand with the above advice. Maintaining a zero balance means you pay zero interest. That means you can earn credit without having to pay extra money.
- Make your payments on time.
- Late payments can negatively impact your credit score, and they can also influence the interest rate you’re eligible for. Poor credit + high interest rates = a slippery slope. Avoid the slope.
- A credit card isn’t extra money.
- This can’t be emphasized enough. Credit cards don’t give you extra money. You still owe that money. Period.
- Don’t make any big purchases on the card that you’ll end up having to pay off over time.
- Just because you can put that new bike or airplane ticket on a credit card doesn’t mean you should. If you won’t be able to pay off the balance at the end of the month, you’ll be paying off that purchase — with interest — and it will take longer and cost more than you ever anticipated.
- Beware the cash advance option!
- Cash from your credit card? Sounds great, right? Not so fast. Cash advance options are, in a word, expensive. Credit cards fees ranging from 3% to 5% — or even higher — for cash advances. Keep in mind these fees are in addition to the interest rates you’ll be paying.
- Avoid opening and closing too many accounts.
- Many people don’t realize that opening and closing credit cards impacts your credit score. Every time you apply to open a card, the card issuer will run an inquiry into your credit — and those inquiries can ding your credit score. Also, your credit score benefits from having a large amount of unused credit available, so closing accounts can potentially hurt your credit score as well. (And canceling a credit card with an outstanding debt balance doesn’t erase that debt!)
- Make sure to select the right card for you.
- Sometimes it feels like you’re offered credit cards at half the cash registers you encounter. Lines like, “You could save 10% today if you sign up for our card!” Don’t be too quick to take the bait. Beware of retailer credit cards that push you into signing up. Treat it like any financial decision: read the fine print, consider the terms and conditions, and consider having a cosigner.
The Bottom Line
The bottom line has everything to do with the bottom line. This is about your financial future. Credit cards can create a pathway to strong credit if you use them responsibly. Pretend it’s cash. Pay off your balances. Be a savvy consumer. If you’re ready to take the plastic plunge, take the research a step further by checking out our Best Student Credit Cards piece.