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Money Matters: What You Need to Know about Credit Cards, Your Credit Score (Q&A)
Credit cards can be necessary and useful, and have become more ubiquitous than cash. But if you don’t have a strategy for using and understanding credit, credit cards can lead to financial mistakes and debt.
In this edition of the Money Matters series, Financial Literacy Coordinator Derek Brainard shares some important information on what students should know about credit, credit cards and the ever-important credit score.
Brainard, an Accredited Financial Counselor, oversees the Office of Financial Literacy, a unit of the Office of Financial Aid and Scholarship Programs. Members of his peer financial coaching team offer financial education to students on money basics, including budgeting, credit, saving, earning and investing. To schedule a free appointment with the team, email FinLit@syr.edu with “coach” in the subject line.
01How can credit cards help and/or hurt your financial situation?
Credit cards themselves are just pieces of plastic that are connected to a line of credit that a lender has offered to you with a maximum borrowing limit and an interest rate. It’s what we do with them that can help or hurt.
Credit cards can help people who use them correctly establish a credit score. Credit scores show potential lenders how reliable you are in repaying borrowed money. The higher the score, the more likely it is that you will get a loan or mortgage at favorable rates. High credit scores and positive credit reports can also be viewed when we’re looking to rent an apartment, applying for insurance and even on the hunt for a job.
Credit cards can hurt when we use them without a plan. Household credit debt was $747 billion in the third quarter of 2016. The average credit card debt per consumer is around $5,400, according to Transunion. Credit card users should make it a point to pay their balances owed in full each month. With average current interest rates around 16 percent, carrying a balance can have long-lasting effects on financial health. Mathematically and financially, it doesn’t make much sense to be paying 16 percent interest on a tank of gas or T-shirt.
02How is a credit score determined?
The most widely used credit score is the FICO (Fair Isaac Corp.) score. The top two factors in the FICO score are payment history (making payments on time) and the amounts owed (utilization rate). The utilization rate is the amount of money owed divided by your total available limit. A utilization of 10 percent of your max limit from month to month would be considered normal, while using 30 percent or more may give the appearance that you are regularly overextending yourself.
FICO scores can range from 300 to 850; scores above 740 are considered “very good.” The length of your credit history, new credit you are applying for and what types of credit you have—your credit mix—are the last three things that impact your score.
03What’s a good first step for a college student looking to apply for a credit card?
The best thing for college students who are thinking about starting to establish credit and a credit history is to learn about how credit works, and how it effectively fits into their overall plan. Some questions to ask before taking on credit would be the following:
- What will I need to borrow for in the future that requires a credit score? How far off is this goal?
- Do my income and budget allow for me to reliably pay off a credit card in full every month, with a very low chance of ever carrying a balance?
- What’s the APR (annual percentage rate, or interest) on this line of credit?
- What fees should I know about (for example, an annual fee, cash advance, finance charges, late payment fees)?
- Will I need a co-signer (such as a parent with established credit that assumes equal liability) to get my first card?
- Can I utilize other credit-building options like secured cards, credit-building loans or simply making timely payments on my student loans, car loans and other installment loans?
04What happens if someone finds themselves overextended?
If someone finds themselves overextended, the first thing to do is stop spending. Common sense, but not commonly done. Sit down with trusted, knowledgeable counsel and create a budget, looking at your ability to make on-time payments and get back to a balanced position.
In a more difficult situation, balance transfers, consolidation and personal loans can be helpful to move debt into a situation with a lower interest rate. But none of it matters if you don’t stop spending.
05What are some online resources your office provides? What are some other resources to find out about handling credit and credit cards?
We offer financial basics about credit on our site. We take a preventive approach. There is also the Federal Trade Commission consumer site at consumer.ftc.gov, with information about credit, loans and identity theft.
Experian, TransUnion and Equifax are the major credit reporting agencies. You can receive one free report a year from each of these companies through annualcreditreport.com.
It’s also important to note that the Credit CARD act of 2009 put provisions in place to protect new-credit seekers under the age of 21. These include requiring a co-signer or being able to prove a means of repayment before approval.