The most important thing to remember about a credit card is that it is a loan. Unlike a debit card that links to your checking account, a credit card provides access to money that belongs to a lender and needs to be paid back. If you do not pay it back in full before the end of a billing cycle, the lender will charge you interest.
Applying for a Credit Card
- Review your credit score to determine if you qualify for credit. Your score will determine how much credit you qualify for and what interest rate you'll pay.
- Research to apply for the right card for YOU. Compare different cards, checking fees, and interest rates. Visit the Office of Student Success for resources to help you make a decision!
- Apply. As a beginner, always look to apply for a card meant for a beginner. Avoid applying to several credit issuers. Each application will show up on your credit report, and having too many in a short time frame will lower your credit score. Be CAUTIOUS of credit card offers that “guaranteed” approval regardless of your credit history. They usually come with very high interest rates and penalty fees.
- Fees: When choosing a card, make sure you understand and compare all the fees. Fees associated with a credit card include annual fee, late fee, cash advance fee, balance transfer fee, foreign transaction fee, over-the-limit fee, and returned payment fee, among others.
- Reporting: Make sure your credit card reports to all three major credit bureaus - Experian, Equifax, and Transunion.
Maintaining Your Credit Card
Now you’ve got a card. What do you do next?
- Study all information provided with the card, including benefits and fraud protection, interest rates, fees, and your credit limit.
- Get online access and sign up for alerts, which gives you a running balance, alerts you when payments are due, and warns you of any unusual transactions.
- ALWAYS pay your balance in full. The minimum payment provided on statement is typically 2–3% of your total balance. If you pay just the minimum, you will deal with much greater interest payments, which may lead to more debt. In some cases, paying the minimum payment leads to negative amortization, meaning that the interest accruing on the debt will make the balance higher every month despite making the minimum payments.
- Set up an automatic payment system. Make sure you confirm that they go through each month.
- Realize your card is a responsibility. Its purpose should be limited to:
- Building Credit: making purchases and paying off the bill each month can help you establish credit
- Emergencies: situations where you need to make large purchases, such as car repair
- Online Purchases: many companies or businesses do not accept another form of payment
Once you've established a history of responsible credit use, you'll reap these benefits of a higher credit score when you make future major purchases:
- Lower interest rates on loans (auto loan, mortgage, personal loan)
- Lower insurance premiums
- Reduced stress when apartment or job hunting—employers and landlords check credit!