65 Credit Strategies

David Evans


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

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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

Learning Outcomes

  • Describe the opportunities, risks, and rewards of owning a credit card

Close up of corners of four credit cards on a table, fanned to show their logos: 2 Visas and 2 Mastercards

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]

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 are even one cent short on the payment, meaning you pay $432.55 instead, 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.

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 $5,000 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.

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.

Compounding Interest

While compounding works to make you money when you are earning interest on savings or investments, it works against you when you are paying the interest on loans. To avoid compounding interest on loans, make sure your payments are at least enough to cover the interest charged each month. The good news is that the interest you are charged will be listed each month on the loan account statements you are sent by the bank or credit union, and fully amortized loans will always cover the interest costs plus enough principal to pay off what you owe by the end of the loan term.

The two most common loans on which people get stuck paying compounding interest are credit cards and student loans. Paying the minimum payment each month on a credit card will just barely cover the interest charged that month while anything you buy with the credit card will begin to accrue interest on the day you make the purchase. Since credit cards charge interest daily, you’ll begin paying interest on the interest immediately, starting the compound-interest snowball working against you. When you get a credit card, always pay the credit card balance down to zero dollars each month to avoid the compound interest trap.

Student loans are another way you can be caught in the compound-interest trap. When you have an unsubsidized student loan or put your loans into deferment, the interest continues to rack up on the loans. Again, you’ll be charged interest on the interest, not just on the original loan amount, forcing you to pay compound interest on the loan.

credit card debt explained

Check out this video for more information on how interest can work against you when you’re making minimum payments on your credit card.

Signs You Have Too Much Debt

You can consider yourself in too much debt if you have any of the following situations:

  • You cannot make your minimum credit card payments.
  • Your money is gone before your next paycheck.
  • Bill collectors are contacting you.
  • You are unable to get a loan.
  • Your paycheck is being garnished by a creditor.
  • You are considering a debt consolidation loan with extra fees added.
  • Your items are repossessed.
  • You do not know your debt or financial situation.

Using Credit Responsibly

Learning Outcomes

  • Explain factors contributing to your credit score and identify resources for assistance with credit issues

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).

Components of a Credit Score and How to Improve Your Credit

Credit scores contain a total of five components. These components are credit payment history (thirty-five percent), credit utilization (thirty percent), length of credit history (fifteen percent), new credit (ten percent), and credit mix (ten percent). The main action you can take to improve your credit score is to stop charging and pay all bills on time. Even if you cannot pay the full amount of the credit card balance, which is the best practice, pay the minimum on time. Paying more is better for your debt load but does not improve your score. Carrying a balance on a credit card does not improve your score. Your score will go down if you pay bills late and owe more than thirty percent of your available credit. Your credit score is a reflection of your willingness and ability to do what you say you will do—pay your debts on time.

What Is a Good Credit Score?

Most credit scores have a 300–850 score range. The higher the score, the lower the risk to lenders. A good credit score is considered to be in the 670–739 score range.

Credit Score Ranges
Credit Score Ranges Rating Description
< 580 Poor This credit score is well below the average score of U.S. consumers and demonstrates to lenders that the borrower may be a risk.
580–669 Fair This credit score is below the average score of U.S. consumers, though many lenders will approve loans with this score.
670–739 Good This credit score is near or slightly above the average of U.S. consumers, and most lenders consider this a good score.
740–799 Very Good This credit score is above the average of U.S. consumers and demonstrates to lenders that the borrower is very dependable.
800+ Exceptional This credit score is well above the average score of U.S. consumers and clearly demonstrates to lenders that the borrower is an exceptionally low risk.

Resources for Credit Issues

a woman lecturing to a group of adults
Credit counselors might be able to recommend budgeting and credit courses that will give you tips for managing your personal finances.

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.


compound interest: this is effectively interest paid on interest, which can snowball and result in an unmanageable debt load later on

daily interest: what credit card issuers charge each day from the date of making a card purchase

credit score: a number derived from one’s credit report that reflects payment history and other metrics and largely determines future credit-worthiness

  1. Cannon, Ellen and Melissa Lambarena. "How to Choose a Student Credit Card." NerdWallet, 28 Oct 2021, www.nerdwallet.com/article/credit-cards/choose-student-credit-card.
  2. “Lost Or Stolen Credit, ATM, and Debit Cards.” Federal Trade Commission: Consumer Information, Aug. 2012, www.consumer.ftc.gov/articles/0213-lost-or-stolen-credit-atm-and-debit-cards.
  3. Trouesh, Joshua Escalante. “Four Surprising Ways Your Credit Score Will Affect Your Life.” Purposeful Finance, 2016, www.purposefulfinance.org/home/Articles/2016/four-surprising-ways-your-credit-score-will-affect-your-life.


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Credit Strategies Copyright © 2023 by David Evans is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

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