Understanding Credit Cards

You have probably seen credit cards in use, or maybe even have one yourself. But do you really know how they work? Read on to learn more about credit cards, why you might want one, and what you should consider before applying. 

Why might you want a credit card?

The most straightforward way to easily access money from your bank account is a debit card. When you swipe a debit card to pay for an item, it immediately withdraws that money from your bank account. But what if you get paid at the end of each month, and do not want to spend too much money before your paycheck hits? Enter, the credit card. When you swipe a credit card to pay for an item, you don’t get charged right at that moment; rather, you get a bill from your bank at the end of month and you pay for all charges then. Because you are essentially taking out a loan from a bank, you will pay your bill at the end of the month with interest. Many credit cards will not charge you any interest if you pay off the balance on your bill within that billing cycle.

Building Credit

A credit card is a great way to start  building up your credit, which is especially important for international students who do not have credit history in the US. When you use a credit card, you are borrowing money from your bank, and if you pay it back consistently at the end of each month, your credit score will go up. A credit score is essentially a measure of how trustworthy you are, and when you consistently pay your credit card bill on time, your trustworthiness grows. Lenders view your credit score when deciding whether to give you a loan, and may also use it to determine the interest rate on a loan. Having a high credit score will serve you well in college and beyond, and using a credit card is a great way to start building up your credit. 

Having a high credit score will serve you well in college and beyond, and using a credit card is a great way to start building up your credit.

Watch out!

Because credit cards do not charge you until the end of the month, they can easily lull you into a false sense of security that makes you feel as if you can purchase more than your budget allows. As you will not see your bank account balance go down after any purchase, it is easy to lose track of your spending, and then be shocked by a large bill at the end of the month. 

If you are unable to pay your end-of-month bill on time, your interest payment will increase steeply, you may have to pay a late fee, and all of this will negatively affect your credit score. Therefore, it is super important that you always pay your end-of-month bill on time and in full.  If you do not pay it in full, many banks will charge interest on the full amount, not just the outstanding balance - so watch out! Keeping track of your finances and sticking to a budget can help  ensure that you are always prepared to pay your bill.

Things to consider when choosing a credit card

It can be tempting to just get a credit card through your bank, but it is worth doing the extra research to pick the best card for you. This might be from your bank, another bank, or an entirely different company. Many airlines, hotels, and retail stores also offer credit cards that can unlock rewards.

Some things to consider when choosing a credit card is their interest rate, any annual fees or foreign transaction fees they may offer, and their late payment fees. 

There are a few types of credit cards to consider, the most common being rewards cards, low-interest cards, and student cards.

  • Rewards cards are the most common types of credit cards, and they give you something back after you make purchases. This can come in the form of cash back, store credit, or miles or points towards a flight or hotel room.
  • Low-interest cards give you very low interest rates instead of giving you rewards. Sometimes, these cards will charge you zero interest rate for an introductory period.  
  • Student cards are meant specifically for  college students who have little or no credit history. To qualify for a student credit card, you usually need to submit proof of independent income. But in some cases, you may be able to have a parent co-sign the card and agree to pay the bill should you be unable.

If you feel that a credit card is the right option for you, and feel confident about managing fees and interest rates, go for it! Having a credit card as a college student is a great way to start building your credit. 

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