Credit Cards: evil, or just misunderstood?
Mathew Carrick / Sun Star
Many college students, myself included, were warned at some point about the dangers of credit cards. Older family members often tell students to avoid the money-spending tools, as they will quickly trap the unwary under terrible amounts of debt. More politically minded critics accuse banks of conspiring against the uneducated with credit cards and trying to exploit the underfunded.
In some ways, those who warn against credit cards are right: managed improperly, users can work themselves into a mountain of debt with a frighteningly high interest rate. However, when used carefully and responsibly, credit cards are valuable financial tools.
A credit card offers a line of credit, which is something like a short-term loan, meaning that I can use a card to purchase something even when I don’t actually have the cash for it—dangerous if spent recklessly, but useful when a paycheck is coming soon. Most cards offer a grace period of about 30 days for the borrower—that’s you—to pay back the amount before charging interest. It’s a good idea, since you’ll pay only what you spent on merchandise and the card issuer will report a good credit score for you.
A credit score is another advantage to using credit cards: this number, associated with your social security number, ranges from 300 (terrible) to 850 (excellent) and indicates your trustworthiness on making payments. A good credit score will help you get a mortgage, car loan, or other forms of credit (even including a better credit card).
Credit scores are used increasingly by landlords and even employers to make sure potential tenants or employees are reliable. Young people in general and college students in particular often don’t have a credit history, so credit cards can be a great way to start one if used responsibly.
So, what do credit card companies get out of the deal? Surprisingly, much of their revenue doesn’t come from charging interest. Whenever you use a credit card to make a purchase, a fraction of the charge goes to the credit card issuer and to the financial network that allows merchants to actually transfer money from your account electronically (e.g., Visa or MasterCard). (This is why many merchants don’t allow you to use AmericanExpress: AmEx charges a higher fee than most other networks.)
Many issuers also charge users fees ranging from monthly account charges (which are often higher on reward cards) to user transaction fees. Fortunately, though, users have a plethora of cards to choose from that charge users little to nothing—just make sure to read the fine print on a contract.
Are you convinced? Good! Make sure to make payments on time and keep careful track of your spending, and you too can enjoy the benefits. However, you may find it difficult to access a credit card if you have no credit history, as issuers are wary of risks.
You should consult someone at your bank or with financial knowledge, but you do have several options. Most banks will offer secured credit cards, which use a certain sum of money (often around $500) in your savings or checking account as collateral to insure against risk of default (what happens when a borrower can’t pay his debts). Many banks also offer low-credit student credit cards aimed at helping young users establish a credit history, and these cards often come with lower fees.
Finally, you can ask an older family member to co-sign a card with you, which lets the bank know they’ll help you out if you get in debt.
Mathew Carrick is an economics major, math minor, and personal finance enthusiast. If you have questions regarding personal finance or financial literacy, feel free to email him at firstname.lastname@example.org for an answer – it may even turn into a column article!