Let’s talk credit cards.
Having a credit card can be both a blessing and a curse for students. On one hand, you have the convenience of tapping your way to a new laptop, travel miles, and an attractive credit score. On the other hand, the road to reward can be cluttered with towering debt and rampant spending sprees.
But it doesn’t have to be so difficult.
Whether you’ve had one for years or are just starting to explore your options, consider this article your guide to credit cards:
A credit card is….
A great way to build your credit score. Having a good score is crucial when you want to buy a house or apply for a loan.
A convenient payment method. No need for fumbling with loonies and quarters – just use your card!
A credit card is not….
Unlimited money. Cards usually come with a limit, which may change based on your needs.
A debit card. When you use a debit card, that money is yours and it’s taken directly out of your account. When swiping your credit card, you’re borrowing money from your bank meaning you have to pay it back later. This means you have to pay off your WHOLE balance, every single month.
How do they work?
- Billing Cycles: After each month, your bank will compile your transactions and send you a credit card statement. To find out how long your billing cycle is, contact your banking provider. If you’re not already doing your banking online, consider setting it up so you’re always on track.
- Balance: Your balance is the outstanding money that you need to pay back to your bank.
- Interest: Interest is the money you pay to your bank as a consequence of late payments or borrowing money. If you don’t pay your full balance by the due date, the balance remaining will collect interest, spiking your balance even more. The more debt you have, the more interest you pay.
- Revolving Credit: Think of it like your phone battery dropping from 100% to 80%. All you have to do is plug your phone in and recharge. The same goes with your credit card. For example, if your monthly limit is $500 and you make a $300 purchase, that means you have $200 in available credit before hitting your limit.
What is a credit score?
Your credit score is an indicator of how responsible you are in paying off your debt. It becomes important when applying for loans as it shows the lender the likelihood of them getting repaid.
Your score is gauged similarly to a weighted grade. It takes into account your purchase history, length of credit history, current debt, how much new credit you have, as well as how many sources of credit you have.
How do I get a better score?
According to FICO, the lowest possible score is 300, the highest being 850. The best way to get a better score is simple — just pay your bills on time. Keep track of your billing dates and monitor your spending habits so you don’t get left feeling frazzled at the end of your billing cycle. It’s a good idea to keep your spending under 30% of your limit and to have diverse lenders. This shows future lenders you are capable of paying back multiple sources.
If you know your score you can see where you fall on the FICO Chart:
Credit card terms EVERYONE should know:
- APR (Annual Percentage Rate): Expressed as a percentage, APR represents the price it will cost you to borrow money. It shows the rate of interest on credit per year. (Ex. A loan of $100, repaid over a year at 30% APR would cost $130)
- Interest Rate: This is the price the lender charges for loaning money. Often, lenders set multiple interest rates. Rates are known as APR and make it easy for consumers to compare multiple cards in a standardized way.
- Grace Period: Time where you are allowed to pay your bill without having to pay interest. Grace periods must last at least 21 days and typically only apply to new purchases.
- Billing Statement: Typically once a month, your financial institution will email or send you a list of all transactions over the month. This includes deposits, withdrawals, transfers, checks, interest and other fees. This gives you a good idea of where your money is allotted each month.
- Utilization Rate/Ratio: Your utilization rate is how much of your credit limit you actually spend. Generally, it should be kept below 30%. The lower the score, the more responsible you appear to lenders, thus improving your overall credit score. For example, if your credit limit is $1,000 then you should only spend around $300.
- Credit Line: Your credit line is also known as your credit limit. This is the amount that can be charged to your account on a given cycle. Remember credit line runs like a revolving cycle and based on your utilization rate, it can be the difference between a good and bad credit score.
For even more help with your finances, take advantage of IGNITE’s Financial Services including bursaries, info on our tax clinic, and more!