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When the cashier asked Jayasai J., a first-year medical student at The University of Toledo in Ohio, if she wanted to apply for a credit card and receive 15 percent off her purchase, the answer was immediate: “Of course!” When used responsibly, credit cards can be a way to build your credit, which is looked at when you apply for loans, apartments, and sometimes even jobs. Follow these steps, and you’ll be on your way to credit success.
Think about your financial needs and your motivation for opening a line of credit. Are you swayed by instant savings or tempted to spend beyond your means? Todd Albery, CEO of Quizzle.com, a Quicken® Loans company in Detroit, Michigan, says sometimes students are charmed by the idea of perks. But unless you have a steady income and can pay the bill in full every month, a credit card probably isn’t for you.
Steve Weisman, a lecturer at Bentley University in Waltham, Massachusetts, says to read the fine print on offers. Make sure you understand every word of the “Terms and Conditions,” and ask for clarification if you don’t.
Marsia Hill Kreaime, director of $uccessful Start at Boston College in Chestnut Hill, Massachusetts, says, “Sometimes [credit] doesn’t feel like actually spending because the bill comes later.”
She suggests treating credit card purchases the same way you would if you used cash. Be mindful of how much actual money you have available and spend less than that. If offered an increase to your line of credit, decline unless it will still be within your means.
If you’re using credit for daily expenses, pretend the money is coming straight out of your bank account. Jared A., a graduate student at Princeton Theological Seminary in New Jersey, suggests, “Always pay the bill on time and use discretion when making large purchases.”
Pay in Full, on Time
Pay your bill in full to avoid interest charges, and always make your payments on time to avoid fees for late or incomplete payments. “The secret to telling a good joke is timing; the same is true with your credit card,” says Weisman.
Becki H., a graduate student at Fitchburg State University in Massachusetts, says, “When possible, I pay the full amount immediately online or on the next payday. I check the balance frequently online and make payments directly from my regular account.”
Always review your bills to make sure the charges match your purchases. If not, contact the credit company right away.
Knowledge is power when it comes to credit. Follow these tips and you’ll be off to a solid start.
What are the differences between credit and debit cards?
Credit cards allow you to postpone paying for your purchases, at least for a short period of time. Usually you’ll have a window of 15-30 days, and if you don’t pay in full by then, fees and interest will start piling up. (It’s essential to read the fine print and know the exact terms of your card.)
Many credit cards are linked with specific perks, such as frequent flyer miles or store discounts. But along with the perks come high penalties for biting off more than you can chew each month.
Your bank can issue you a debit card, which acts just like cash. When you use it, the price of your purchase is automatically deducted from your account. Debit cards keep an electronic trail of what you buy, so they can help you track how much you spend on what sorts of things.
Some debit cards offer “overdraft protection,” meaning that the bank will cover you if you overspend. But be careful: This type of service comes with hefty fees and interest, which starts to accumulate immediately upon using more money than you actually have in your account.
Some key 'fine print' terms
Quite simply, APR is the cost of borrowing money. This rate takes into account all the fees and interest rates associated with the credit card to make it easier for consumers to compare different cards.
If a card is advertised as having 0% APR for 12 months, that means there’s no interest for only those 12 months. Afterward, the APR goes up to whatever is normal for that card. During the 12 months, you still have to make monthly payments, or you’ll be slapped with lots of fees.
The amount of time you have to pay for your purchase before interest is charged.
Your credit card company will sometimes send you checks to accompany your credit card, but beware: The fees associated with cash advances are often very high.
Variable Interest Rate (vs. Fixed Interest Rate)
With many cards, the interest rate can change after you apply. Changes are usually small, and the credit company must inform you before the change is made, but make sure you’re aware of the possibility.
Learn how to understand your credit report
Credit score or Credit rating:
A number assigned to you based on your spending, repayment, and debt patterns.
A report of your credit history. Consumers can use this to make sure their credit rating is accurate. You are entitled to get a copy of your report from the three major companies that provide them, for free, once per year.
More about credit reports
Get help or find out more
Board of Governors of the Federal Reserve System, Consumer’s Guide, Credit Cards
Wake Technical Community College, Suntrust Center for Financial Education, Credit Management
Boston College, $uccessful Start, Credit
Federal Trade Commission, Consumer Information, Money & Credit
Mapping Your Future, Manage your money