Introduction:

What you’ll learn to do: explore factors relating to use of credit including using credit cards and the importance of your credit score

Procrastination is like a credit card: it’s a lot of fun until you get the bill.

—Christopher Parker, actor

By the end of this section, you will be able to describe the opportunities, risks, and rewards of owning a credit card. You will also be able to explain factors contributing to your credit score and identify resources for assistance with credit issues.

Credit Card Opportunities

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 the 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. Without money in an account and assurance that you can pay your monthly credit bill, the average student may not seem very credit-worthy. 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. At Florida Southwestern State College (FSW) we have a special relationship with Suncoast Credit Union and they offer credit cards designed for college 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.
• Rewards for good grades: Some companies offer credit card agreements that reward students for excelling academically. For example, you may receive cash back every year if you maintain a certain grade-point average.
• Effective customer service: Credit card companies that have positive customer service reviews often provide extra support in answering questions from new customers. Some companies also have tools for their customers’ online accounts that help them pinpoint their spending and payment habits.[2]
• 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 evaluated your credit worthiness for loans and more.^[1]

Risks and Rewards of Credit

Credit cards can give students new opportunities, but owning them is also a big responsibility. Students should consider the advantages and disadvantages of credit before choosing the best plan.

Credit Pros

• Secure and convenient method of making purchases: When you carry cash, you have the potential of having the money lost or stolen. A credit card or debit card, on the other hand, can be canceled and replaced at no cost to you.
• Greater consumer protections than debit cards: These consumer protections are written into law, and with credit cards you have a maximum liability of $50. With a debit card, you are responsible for transfers made up until the point you report the card stolen. In order to have the same protections as with credit cards, you need to report the card lost or stolen within forty-eight hours. The longer you wait to report the loss of the card, or the longer it takes you to realize you lost your card, the more money you may be responsible for, up to an unlimited amount.^[2]
• Building credit: If you pay off your monthly credit card every month on time, you will start building credit and have a good credit score early on. Your credit score can be an important factor later on if you decide to open another account or take out a loan. Some employers may even want to see your credit history. While most people associate a credit score with getting better rates on loans, credit scores are also important to getting a job, lowering car insurance rates, and finding an apartment.^[3]

Credit Cons

• Overspending: If something is out of sight, it may be out of mind and the same can be true of money. Sometimes people overspend with credit cards because it’s easy to think that you have more money than you really do.
• Interest: Credit card companies with student deals still typically include some level of APR or interest rate. If you don’t pay off the entire balance every month, using a credit card can be expensive. Suppose you decide to use your credit card to pay for $1,000 in school supplies and books. Credit Card 1 has an APR of ten percent, and Credit Card 2 has an APR of twenty-four percent. If it takes you a year to pay off the $1,000, you’d actually pay a total of $1,055.04 with Credit Card 1 and $1,134.72 with Credit Card 2—that’s $55 for the first card or $135 for the second card on top of the original $1,000 you charged. This example highlights the importance of making sure you pay off the balance as soon as possible AND choosing a credit card with a lower interest rate.
• Debt: Unlike debit cards, credit cards allow users to borrow money that they can pay back at a later date. While this allowance can be useful in emergency situations, you may end up charging more than you can afford to pay back right way, and you may find yourself saddled with debt. Carrying a lot of debt can damage your credit history and credit score.

The Danger of Debt

When you take out a loan, you take on an obligation to pay the money back, with interest, through a monthly payment. You will take this debt with you when you apply for auto loans or home loans, when you enter into a marriage, when you buy a home, and so on. Effectively, you have committed your future income to the loan. While student loans can be a good idea, if you take on too many loans, your future self will be poor no matter how much money you make. To make it worse, you’ll be transferring more and more of your money to the bank through interest payments.

Using Credit Responsibly

Credit History and Credit Reports

You begin to establish a credit history as soon as you get your first credit card or get a loan. Your credit history includes information about the number of credit cards and loans you have and how conscientious you are about paying your bills. Three companies, TransUnion, Equifax, and Experian, collect this information and use it to create a credit report, which functions as a summary of your credit history. By law, you’re entitled to one free credit report each year from Annual Credit Report. Although you have to pay extra for your credit score to be included with your credit report, a lot of people use report this as a quick reference to gauge how good or bad their credit is. Different companies use slightly different ratings, but 300 or so is considered to be a low credit score, and 700–850 is considered to be high.

It’s a good idea to sign up for a free credit report from the Annual Credit Report since other companies will charge to give you your credit history and score. The best thing you can do is to keep track of your bills and pay them in a timely manner so you don’t have to worry about whether your credit is good or not. Potential landlords, banks, loan companies, car dealers, and even employers will often ask for your name and social security number so that they can obtain your credit information. Every business is different, but many use credit scores to evaluate prospective customers and decide how responsible or risky they might be.

The following video shows how your credit score is determined and gives some rules of the road for improving your current credit rating.

You can view the transcript for “How to Build a Good Credit Score” here (opens in new window).

Resources for Credit Issues

Maintaining credit is a big responsibility, and sometimes it can be challenging. For example, you might have to borrow more student loans than you want because you don’t have time to work while attending school, or it might be difficult to find a decent-paying job as a student or recent graduate. These are just a couple of issues that could threaten your credit. Repairing bad credit can take a long time—up to seven years—so it’s important to take action as soon as you’re having trouble paying bills or overspending. Different resources and options are available to help you deal with credit issues, including the following:

• Loan consolidation: Students may consider having multiple loans consolidated with the federal government so they have to make only one loan payment per month. While this consolidation may give you more time to pay off student loan debt, it may not be the best option, since the one monthly payment can cost more and accrue a higher interest rate. Students should talk to loan company representatives and financial aid resources at their institution to discuss other payment options, such as income-based payments in which the amount you pay each month is based on your income level.
• Credit counselors: Credit counselors are trained to help people develop personal budgets and to provide classes on savings and debt solutions. They may also offer debt management plans in which they work with your credit card and loan companies to arrange a deal and ask you for monthly deposits so that they can help you pay off your debts. If you are interested in a consultation from a credit counselor, you should ask family, friends, or your local government for references for reputable ones. You will also want to find counselors that do not charge customers too much for their services to avoid additional debt.
• Debt settlement plans: Debt collection companies will offer services to their clients that involve talking to credit card and loan companies and coming up with a plan to pay a lump sum instead of the total debt owed. Similar to finding credit counselors, you should contact local government offices to find reputable debt collection companies so you can avoid overpayments and scams.
• Bankruptcy: Bankruptcy is an official status that is obtained through court procedures, and it means that means you are unable to pay off your debts. People may file for Chapter 13 bankruptcy, which means they don’t lose any assets and have a payment plan of three to five years to pay off their debts, or Chapter 7 bankruptcy, which means they may have to surrender assets that can be used to pay off their debts. Bankruptcy damages your credit score, and the fees for filing paperwork and hiring an attorney can be costly, so it is important to consider other financial solutions first.