Credit Cards

Credit cards allow you to make purchases without paying for them upfront. Instead, you make payments when you receive a monthly statement with the charges listed.

Credit cards are one of the most useful items in your financial toolbox. They can help you build credit, keep track of your spending, and protect your money. If you use a credit card irresponsibly, though, it can spiral out of control and damage your entire financial outlook. With a poor credit history, you can expect to have higher interest rates when you borrow or you may not even be able to borrow at all. With a warning like that, how do you know if you're ready for one?

Why Should You Get a Credit Card?

As a student, the main reason to get a credit card is to start building credit. Your credit history affects your ability to rent an apartment, get a job, and buy a car or a house, and the earlier you start building credit, the better. As you use a credit card and keep up with the payments, your credit score improves, which will save you money in the long run.

Aside from building credit, credit cards allow you to keep track of your spending, since you'll receive a statement each month that lists all of the charges on your card. You'll also be better protected against theft: You can cancel your card if it is stolen and may even be able to remove some of the charges. Finally, depending on your card, you might earn rewards by using it.

Why Shouldn't You Get a Credit Card?

If you have no steady course of income each month, then it may make sense to hold off getting a credit card. There is nothing worse than getting a credit card bill and having no idea how you are going to make the minimum payment.

It's easy to overspend with a credit card, since you don't have to pay for your purchases upfront. It's also easy to start racking up debt by not paying your full bill each month. Credit card companies allow you to make a small "minimum" payment each month; then they charge you interest as you pay off the rest. As you fall into greater debt, you end up paying far more for your purchases than their original purchase price.

As a student, you can use a credit card for regular purchases that you make anyway, like groceries. This is a great way to use a credit card responsibly - spending within your means and paying off all of your charges every month. If you always pay in full, you never have to pay anything in interest fees. If you aren't confident that you can use a credit card this way, you might not be ready for one yet.

How Should You Choose a Credit Card?

Just like picking a bank, there are a lot of things to look for in a credit card. Make sure to research them well - it's better to get the right card the first time than to switch cards frequently.

• Interest rate (APR). If you plan on paying your balance in full every month, then this isn't a big deal. As soon as you start paying anything less than your full balance, though, this becomes very important.
   
• Credit limit. Think carefully about how much you will charge to the card each month, and keep in mind the ideal 30% ratio described below under "Credit Utilization Ratio." You don't want to be bumping up against your credit limit all the time, but you also don't want an astronomical limit that tempts you to spend too much.
   
• Annual fee. Plenty of cards don't have an annual fee. If the card offers rewards, try to estimate if those rewards will be worth more than the annual fee.
   
• "Hidden" fees. Card companies love to charge fees - late payment fees, inactivity fees, account closure fees... and so on. Try to find a card without too many additional fees, or at least be very aware of the fees so you can avoid them.

When you're ready to apply for a card, you can search the web for student credit card comparisons so you can look at several card options side-by-side. Applying specifically for student cards gives you a better chance of being accepted. After you narrow down your options, only apply for one or two - submitting too many credit card applications in a short period of time hurts your credit score.

Quick Guide to Credit Card Terms

Annual Percentage Rate (APR): The rate at which interest is charged on your card balance. Your monthly interest rate is your APR divided by 12.

Average Daily Balance: A method that credit card companies use to determine how much interest you owe. Your daily card balances over the past month are averaged and then multiplied by the monthly interest rate.

Credit Limit: The maximum balance that you can have on your card. If you reach this maximum, you must start paying it off in order to continue using the card.

Credit Utilization Ratio: Your current balance compared to your credit limit. If your card has a credit limit of $1,000 and your current balance is $400, your utilization ratio is 40%. For a good credit score, try to keep this ratio under 30%.

Minimum Payment: The smallest amount that you must pay on your credit card bill. Making a minimum payment means you will incur a large amount of interest.

Variable Interest Rate: An interest rate that changes over time, according to market rates.

More Information

For more tips on using credit cards and building good credit, check out the Credit Reports page.