In Hollywood movies, characters are often seen using their parent’s credit cards with no consequences. These actors swipe their plastic while they shop for designer handbags or even a new car. What you won’t see is the consequences of their actions. These scenes are excluded to deceive you, as the expectations of credit cards are almost always different from the realities.
1. A credit card will allow me to spend as much money as I want, right?
Expectation: A lot of my friends already have credit cards, and it seems like they can buy whatever they want. I want that kind of freedom and flexibility too, so I can get my favorite things whenever I feel like it. Applying for my first credit card means I will soon be able to buy everything I want.
Reality: Although swiping for all of your purchases may feel fun in the moment, you will have to pay back the money eventually. Not all credit card applicants can responsibly handle a large amount of credit at one time. Therefore, credit card limits are often determined based on the individual's credit history and information provided during the credit card application process.
A credit limit is the amount of credit that you are allowed to spend each month. Also known as a credit line, it is approved based on the quality of your credit and your ability to pay it back. Only with the responsible use of credit over time will your credit line increase.
2. Is there only one type of credit card?
Expectation: My parents and friends all have the same credit card. I just received a card offer for the same one in the mail. I really haven’t seen any other options, so I guess this is the only credit card I can get.
Reality: There are many different kinds of credit cards, including regular or unsecured credit cards, student cards, and more. For those who have never been an authorized user for someone else’s credit card, had a card of their own, or took out a loan to build their credit history, there may be fewer credit card options available. Common types of credit cards for college students to know about are student credit cards and secured credit cards.
Student credit cards are appropriately named, as these cards are created with the needs of college students in mind. Student cards can be very helpful for those with nonexistent credit. Issuers that offer these types of cards generally offer exclusive perks to students. This is one of the best cards to choose from if you’re looking to begin building your credit while attending school.
Secured cards get their name because you have to provide a down payment, or security deposit, to be able to open an account. These cards are good for people looking to establish credit or to rebuild poor credit. If you do not make your payments, the credit card issuer can take money out of your deposit to pay your debt. Because credit cards can have perks or annual fees, you must pick the one that is best for you. As a general practice, never borrow more than you can pay back, and always pay your bills on time.
3. Does a credit card replace my need to budget?
Expectation: Now that I have my first credit card, I don’t have to worry about keeping track of what I spend. The credit card company will send me a statement at the end of the month, so I can just use my card for whatever I need and review it later.
Reality: Unlike paying with debit cards or cash, credit expenses can be easily forgotten about until they show up in next month’s credit statement. This can lead to a false estimation of how much money you have left to spend each month. Creating a new category in your budget titled ‘Credit Card Expenses’ will provide a better representation of the actual amount of money that you have left over.
Other credit-related expenses, like late fees, can also sneak up on you. It is important to look at the criteria of multiple credit cards to determine which will fit the best in your budget. Keeping track of all your credit expenses is important when managing your budget and avoiding budgeting mistakes.
4. Should I only repay the minimum balance?
Expectation: I spent more than I thought this month because I got a little carried away with online shopping. But this is no big deal, as I can just pay the minimum on my credit card. It’s cheaper that way, and I’ll have more money to spend right now.
Reality: Whenever possible, you should strive to pay back the full balance of your credit card statement each month. If you carry a balance from your previous statement into the next statement, you will be charged an interest rate on your purchases. Interest is the cost of borrowing money, and can add up quickly. If you’re not able to pay the entire balance, then aim to pay more than the minimum, if possible. Setting up automatic payments could reduce the risk of forgetting to pay your bill.
It’s ideal to treat your credit card in the same way as you would a debit card. Debit cards will generally only authorize the purchase if you have the money in your checking account. To reduce the likelihood of accruing a large amount of debt that will show up on future credit reports, pretend your credit card will only approve the purchase if you physically have the money.
5. How do credit cards affect my credit score?
Expectation: I just got my first credit card. I’m excited to use it, but also a little nervous. I’ve heard that credit cards can affect your credit score, and I don’t really know how it works. I don’t want to hurt my credit before I really even understand what it is.
Reality: When you apply for a credit card, it is considered a hard inquiry. This means you have given a potential lender your permission to look through your credit history. They will use this information to decide if they want to approve or deny your credit application. It is also used to determine how much credit will be offered to you. When a hard inquiry is performed, it may potentially cause a decrease in your credit score, but this is usually temporary.
The most effective way to make a positive impact on your credit score is to be responsible with your credit. Always make regular credit card payments, as missing a due date can hurt your credit score. It’s also beneficial to maintain a low credit utilization ratio, which is the comparison between the amount of credit that you are currently borrowing and the amount of credit that is available to you. A higher credit utilization ratio means that you are borrowing more money from the credit issuer, which can potentially lead to an accumulation of debt.
Your credit score is determined by the three major credit bureaus: Equifax, Experian, and Transunion. They will analyze your financial data and assign you a score between 300-850. This score can determine whether or not you will be approved for future loans. Good credit is important when it comes time to make a major purpose, like a car or a house.
6. Can I avoid credit card fraud?
Expectation: I know I need to be careful with my credit card, but I’m not really sure how to keep my information safe. If someone somehow gets my card details, they could spend a bunch of money, and I’ll have to pay it back.
Reality: Credit card fraud can occur when you lose your card or when you share your information with the wrong person, whether by accident or on purpose. If you believe your credit card account has been compromised, you should alert your card issuer as soon as possible. You will not be held liable for any unauthorized purchases that happen after.
There are preventative measures you can take to help ensure you don’t become a victim of credit card fraud, such as using machines with chip readers and not storing your information on online shopping websites. You should always check the statements your credit card company provides and make sure they match your purchases for the month. The Consumer Financial Protection Bureau also recommends you check your credit report for any errors or inconsistencies at least once per year.
Before you get your first credit card, you'll likely have many credit card questions. Unlike actors in the movies you watch, you will have to deal with the consequences of purchasing that hot tub or new motorcycle on credit. When used wisely, a credit card can provide an abundance of benefits, but these can be taken away just as quickly. By making informed choices and practicing responsible spending, you can use credit to your advantage to start building a solid financial future.
