Let's Talk About Credit

What exactly is credit? We hear about it often but may not know exactly what it means. Credit is borrowing money for goods or services and agreeing to pay it back in the future, with any applicable finance charges.

Using credit responsibly establishes a good foundation towards building your financial future.

The Good

Building Credit

Good credit saves you money and opens doors. Most lenders use credit scores to determine the cost of doing business with you and in some instances, whether to do business with you at all. Credit is important if you ever decide to:

  • Finance buying a car or a house
  • Take out a bank loan
  • Rent a house or apartment
  • Get a cell phone plan in your own name

Or in case you want to:

  • Get a job that requires potential employers to check your credit
  • Get better insurance premiums, higher credit scores = lower insurance rates
  • Hook up utilities - good credit means you may avoid paying a security deposit
What is a Credit Score?

A credit score is a number generated by information gathered from the three credit reporting agencies (Equifax, Transunion and Experian) designed to predict the likelihood that you will pay back money you borrow. A low credit score means you’re more likely to default on your debts, a high score means that you are more likely to pay your debts on time and in full.

Good Credit Score

Credit Scores are comprised of the following:

  • Payment history (35%) – Pay your bills on time! The quickest way to ruin your credit is to make late payments or miss payments all together.
  • Amount owed (30%) - Don’t max out your cards. A good rule of thumb is to stay within 30% of your credit limit. If your credit limit is $1,000 keep your spending under $300.
  • Length of credit history (15%) - Building credit takes time. The longer your credit history, the better - as long as you have managed your credit well.
  • Type of credit used (10%) – Diversity increases your credit score. Lenders like to see responsible credit management across a variety of types of accounts.
  • New Credit (10%) - Only apply for credit you need. Opening many cards at once actually lowers your credit score.

Regardless of the type of credit, managing credit wisely improves your credit score.

Do I need to know my credit score?

For most college students the answer is no. While you don’t need to know the actual number, keep in mind that a good credit score takes time to build, and your credit history stays with you for seven years. Take a minute to think about where you were seven years ago. Now think about where you want to be seven years from now. Decisions you make today may show up on your credit report when you are ready to make a major purchase , or want to establish accounts in your name.

Credit Cards

When you pay for those shoes you’ve been dying to own with your credit card, the store is paid by your credit card issuer at the time of purchase. However, you aren’t required to pay for the shoes until you receive your billing statement, which could be 25 days after your purchase. Your credit card company is extending you a loan for that time.

If you pay your balance on time and in full, you aren’t charged interest and are basically getting an interest free loan…..while building good credit!

By paying the minimum payment or a portion of the total amount of your balance, you will be charged finance charges based on the card’s annual percentage rate or APR. Beware, by not paying your balance in full, your purchases can end up costing you much more than the sticker price!

Avoid paying unnecessary finance charges by paying your balance in full and on time.

Benefits of a Credit Card

If used wisely, credit cards can be useful in building your credit history. Credit cards are beneficial for:

  • Building and maintaining good credit
  • Travel reservations, airline tickets, car rentals
  • Online purchases or other transactions that don’t take cash
  • Emergencies

Using credit cards responsibly can be the first step in establishing a good credit history.

The Bad

Annual Fees

Annual fees are the charge that credit card issuers charge each year, and can range from $15-$500. These fees help offset the cost of rewards associated with that card. For most college students, your yearly spending won’t be enough to earn more benefits than the cost of the annual fee.

There are many credit cards that don’t charge an annual fee, some of them even offer rewards.

Do your homework, compare cards and opt for the card that offers you rewards, without charging you a yearly fee.

Introductory APR

Taking advantage of an introductory APR that can be as low as 0% may be tempting. Read the fine print, most of these offers end 6 months to a year after you open the card. Often a low introductory APR , will increase to a higher than average rate after the introductory period, costing you more in the long run.

Knowing the terms prior to signing up for a credit card, will enable you to compare interest rates and choose the best card for you!

Minimum Monthly Payment

A minimum payment is the smallest amount you can pay toward your purchases without incurring fees or negative credit reporting. Since each minimum payment covers the previous month’s interest and only a small percentage of your balance, paying the minimum amount can be expensive. Let’s look at the true cost of making the minimum payment.

If you charge $950 for a brand new smartphone on your credit card, with an interest rate of 19% and only make the minimum payment.....

It will take 4 years and 9 months and to pay off that smartphone.
And the ultimate cost will be $1,441!

Do you think you will still have that phone almost 5 years later? Do you really want to spend $1,400 on a phone?!?!?!

While it may be tempting to make the minimum monthly payment, save money by paying your balance in full, or by consistently paying more than the minimum payment. To see the true cost of paying your minimum payment, take a look at the credit card payoff calculator.

Late Payments

Paying less than the minimum amount due or making your payment after the due date are both considered late payments. Missing a credit card payment or two can be costly. It can:

  • Negatively affect your credit
  • Cost you in the form of higher interest rates
  • Cost you late fees of up to $38
  • Increase the time it takes to pay down your outstanding debt
  • Be the reason your credit card issuer reduces your spending limit
Retail Credit Cards

Have you ever been to a store and been asked if you’d like to save 10% on your purchase by opening that store’s credit card? Even if that purchase is only $10?!?!

Retailers know that of those who take advantage of this offer, very few pay off their entire balance when they receive their statement. The interest retailers make on folks who carry a balance more than covers the cost of the 10% discount you’ve just received.

Remember a store credit card can only be used at that retailer, and these cards typically have higher interest rates and penalty fees. In 2017, the average annual percentage rate or APR on retail credit cards went up to $24.99%. Ouch!

Opt-in Protection

It’s important to know what the credit limit is on your credit card. The credit limit is the maximum amount you can charge on that card. Your credit card issuer can’t process a payment that causes you to go over your credit limit unless you have opted-in and agreed to pay the over-limit fees, which can be as much as $35!

While having your card declined may be embarrassing, not opting in prevents you from overspending. Monitoring your credit spending can help you to avoid the awkwardness of having your card declined when you’re out with friends.

Opt-in protection can be expensive and encourage overspending!

Canceling an Unused Card

Now that you know that 30% of your credit score is made up of the amount of credit used in relation to your total credit limit, you may want to think twice about cancelling that credit card.

For example, you have two credit cards each with a $500 limit for a total of $1,000 of available credit. You are carrying $250 of debt between the two cards, using 25% of your available credit limit. If you cancel one of these cards your credit limit will be reduced to $500. Now, although you still owe $250 you are using 50% of your available credit, causing the credit rating agencies to think of you as a higher risk, which lowers your credit score.

A better solution is to remove the card from your wallet, even cutting it up if you know it’s going to be an issue, but NOT cancelling the card. (Remember, to delete any saved credit card information from online retailers to avoid using the wrong card in error.)

The Ugly

Cash Advance

A cash advance is a transaction that allows you to withdraw cash through your credit card. It can work like a debit card: allowing you to withdraw cash from an ATM, or from a bank, up to your credit limit. Another way to take out a cash advance is by using the convenience checks you receive with your credit card statement. However, unlike using your debit card or personal checking account, cash advances can be very expensive.

Cash advances charge a transaction fee, and have a higher interest rate than the rate for purchases. There is no grace period, interest starts accruing as soon as the transaction is processed, which could cost you a great deal ininterest fees alone!

Ultimately, a cash advance is a very expensive short-term cash loan.

Credit Card Theft

If someone steals your credit card information, contact your credit card company as soon as possible. Once you inform the card issuer of the theft, your liability is capped at $50.

After notifying the credit card company of the fraudulent activity:

  • Contact all three credit bureaus to flag your account
  • Submit a police report
  • Remove any credit card information stored on any online sites
  • Check your credit report for free – www.annualcreditreport.com *
  • Consider hiring a reputable credit monitoring service

* You can check your credit for free, once a year from each of the three credit reporting agencies: Transunion, Experian and Equifax and it won’t affect your credit!

Protecting your Information

While adding chip technology to credit cards has greatly reduced fraudulent in-person credit card transactions, you still need to take precautions to ensure that someone doesn’t use your information to make purchases without your permission.

Protect your information by:

  • Never lending your card information
  • Shred old cards and statements
  • Don’t trust emails that ask for specific personal information
  • Shop with reputable websites, and be sure to log off when finished
  • Check your account often
  • Save your receipts until after you receive your statement
  • Review your statement carefully
  • Check with your bank to see if they offer identity theft protection

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