Credit Cards 101: Everything You Need to Know About How They Work

Credit cards can be a powerful financial tool for college students, offering a path to build credit and manage expenses. But with great power comes great responsibility, and many students find themselves overwhelmed by credit card debt. In this post, we'll explore smart strategies for using credit cards in college—from understanding how credit works to maximizing rewards and avoiding debt traps—to set you up for financial success. Let's dive in.

Key takeaways

• Pay your full balance each month to avoid interest charges and debt accumulation
• Choose a card with rewards that match your spending habits, like cash back on textbooks or dining
• Treat your credit card like a debit card, only spending what you can afford to pay off immediately

How do credit cards work?

Before we jump into strategies, let's break down how credit cards actually work. Your credit limit is the maximum amount you can borrow, and your available credit is the portion of your limit you haven't used yet.

Each month, you'll have a billing cycle—usually about a month—ending with your statement date. After that, there's a grace period, typically 21-25 days, during which you can pay your balance interest-free.

It's important to understand other key terms like the Annual Percentage Rate (APR), which is the interest rate you'll pay if you carry a balance beyond the grace period, and the minimum payment, the smallest amount you must pay by the due date to keep your account in good standing.

Also, knowing how interest is calculated—usually daily based on your average daily balance and APR—can help you manage your finances better.

TuitionHero Tip

The average credit card limit for a college student is around $1,500. But remember, a higher limit doesn't mean you should max it out!

Types of credit cards

• Secured cards: Require a deposit, easier to qualify for
• Unsecured cards: No deposit, but may have stricter requirements
• Student-specific cards: Often offer perks tailored to college life

How can you build credit responsibly?

Here are some of the ways you can use to responsibly build your credit:

• Use your card regularly for small purchases
• Always pay your full balance on time
• Keep your credit utilization below 30% of your limit
• Monitor your credit score using free tools

Additionally, keeping your oldest credit card open, even if you don't use it frequently, helps maintain a longer credit history, which can improve your credit score over time.

TuitionHero Tip

Set up automatic payments for at least the minimum amount due to avoid late fees.

Dos and don’ts of building credit

When starting to build credit, it's important to be mindful of your habits. Here are some key steps to keep in mind when starting to build credit.

How can you avoid paying interest?

To avoid paying interest:

• Pay your full statement balance by the due date
• Understand your card's grace period
• Avoid cash advances, which often have no grace period
• If you must carry a balance, pay as much as you can above the minimum

Consider making multiple payments throughout the month to keep your balance low and reduce interest charges.

What kind of rewards can you get from credit cards?

Credit cards offer various types of rewards to boost your spending power. Look for cash back on everyday purchases like groceries, gas, or dining.

Travel points can be beneficial for future adventures, and some cards offer statement credits for streaming services or textbooks. Introductory bonuses are another perk; some cards offer sign-up bonuses after you spend a certain amount within the first few months.

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Can a credit card help you manage money?

Absolutely. You can use your card's app or online portal to categorize spending and set up alerts for when you're nearing your personal spending limits. Treating your credit card like a debit card—only spending what you have—is a smart approach.

Case study

Consider the case of Sarah, a junior at State University. She used her card's spending tracker to identify $50 in monthly subscriptions she had forgotten about. By canceling unused services, she saved $600 over the school year!

Credit cards vs. emergency fund

While having an emergency fund is ideal, sometimes credit cards can be a lifeline. If you must use a card for emergencies, have a plan to pay it off quickly.

Look into 0% APR balance transfer offers, and contact your issuer about hardship programs if needed. Building an emergency fund, even a small one, can reduce reliance on credit cards for unexpected expenses.

TuitionHero Tip

Credit cards should be a last resort for true emergencies, not for covering regular expenses you can't afford.

Tips to keep your credit card safe

As a student, you're often juggling multiple responsibilities. Don't let credit card security slip through the cracks. Here are some essential tips to keep your financial information safe:

• Never share your PIN or card details with anyone, even close friends
• Use secure Wi-Fi networks when accessing your card account online
• Enable two-factor authentication for your credit card app or online portal
• Regularly check your statements for any unauthorized charges
• If your card is lost or stolen, report it to your issuer immediately
• Be cautious of phishing emails or messages that ask for personal information

You should also consider using a digital wallet on your smartphone for added security when making purchases.

Why trust TuitionHero

At TuitionHero, we simplify student finance with tailored credit card offers. Our cards are designed to help with expenses like textbooks and dorm essentials, offering convenience and rewards. Beyond credit cards, we provide private student loans, loan refinancing, scholarships, and FAFSA assistance. We understand your financial challenges and are here to support your success.

Frequently asked questions (FAQ)

What determines the credit limit on a credit card?

The credit limit on a card depends on many factors, mainly your creditworthiness. This includes your credit history, current income level, and your overall debt-to-income ratio. Lenders assess this information to decide how much risk they're willing to take and then decide on a credit limit that matches that risk.

Can too many credit card inquiries affect my credit score?

Yes. Each time you apply for a credit card, the provider does a "hard inquiry" on your credit report. Multiple hard inquiries in a short span can potentially lower your credit score. It's crucial to apply for new credit carefully and make sure you genuinely need the card.

How do balance transfers work?

A balance transfer involves moving the debt from one credit card to another, typically to benefit from a lower interest rate on the new card. This can be a strategic move to save on interest, especially if the new card offers a promotional period with a 0% interest rate. But it's essential to be aware of any balance transfer fees and make sure you can pay off the balance before the promotional rate expires.

Are there credit cards specifically designed for students?

Yes, there are credit cards tailored for students. These cards often come with lower credit limits and are designed to help students build credit from a young age. They might also offer rewards geared towards student lifestyles, like cash back on textbooks or dining. However, as with all credit cards, it's essential to use them responsibly to avoid accumulating debt.

How does a student credit card differ from a regular credit card?

Student credit cards are tailored for college students, often featuring lower credit limits, more lenient approval requirements, and rewards geared towards student spending. They may also offer educational resources to help students learn about credit management. While they function similarly to regular credit cards, student cards are designed as a stepping stone to help young adults build credit responsibly.

Can I use my student credit card after I graduate?

Yes, you can continue to use your student credit card after graduation. However, it's worth reassessing your financial needs at this point.

You may qualify for cards with better rewards or lower interest rates based on your improved credit history. Some issuers automatically upgrade student cards to regular credit cards once you graduate.

What credit score do I need to get approved for a student credit card?

Most student credit cards don't require a long credit history, making them accessible to those new to credit. Some issuers may approve students with no credit history at all.

However, if you do have a credit score, aim for at least 630 (considered fair credit) to increase your chances of approval. Remember, your income and ability to repay will also be factors in the decision.

Final thoughts

Mastering credit card use in college is a crucial step toward financial independence. By understanding how credit works, using cards responsibly, and leveraging their benefits, you can build a strong credit foundation that will serve you well beyond graduation.

Start small, stay vigilant, and always prioritize paying your balance in full. Your future self will thank you for the solid financial habits you're building today.

Sources

• FDIC: Consumer Assistance Topics - Credit Cards
• Credit card - Wikipedia