All About Credit Cards

Posted at 22:16 on Saturday August 21, 2004 | Filed Under Introductory Articles , Saving

Do you have a credit card?

If not, you should. A credit card lets you start building credit, which will let you get loans for cars, houses, etc.

"But Ramit," you might say...

"I already have a debit card. Isn't that the same thing?"
Nope. A debit card (aka a check card) takes money directly out of your checking account. Even if it has the Visa/Mastercard logo on it, it's not building your credit.

"How does a credit card work?"
The credit-card company lets you spend money with the understanding that you'll pay it back (at least some of it) at the end of month. Unlike with a debit card, with a credit card you could have $0.00 in your bank account and you'd still be able to spend. Basically, the credit card gives you a short loan.

There are a couple catches, though: They give you a spending limit (usually $500 or $1,000 for new card holders). They'll raise this periodically of if you ask them. Also, if you don't completely pay off your bill at the end of the month, you'll owe an enormous amount of interest on the remainder, usually about 20%!

Bottom line: Credit cards are free loans if you pay your monthly balance. If you can't pay it off by the end of the month, don't buy it.

"What credit card should I get?"
If you're a normal college student, you probably have 50 of those idiotic credit-card offers in your mailbox. You know why credit-card mailings are so popular with college students? Because they don't know how to budget and often pay the maximum in interest and finance charges. Throw them away.

Here are some things to look for in a good credit card:
-No annual fee. Don't pay it. It's that simple.
-Rewards or rebates. These are getting increasingly popular; you can get a percentage of your total spending back, or get gift certificates/miles from retailers like United, Amazon, Home Depot, etc. I have a United student card myself.
-Availability. Visa and Mastercard are accepted everywhere. Discover is accepted almost everywhere (what's up Macy's?). American Express is less so, so think twice about getting one of these.

"Where can I find a list of credit cards?"
You can search and sort through credit-card deals at BankRate.com

Now what?

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Comments (5)

1.: Hi; I just found this website (through organizedhome.com) and am really enjoying it. Apparently financial stuff can actually be fun sometimes. ;-)

I've got what might be a slightly dumb question about credit cards, however: as a college student heavily in student loan debt, is it still a good idea to get a credit card? Will that not prompt creditors (bankers, lenders, the powers that be) to notice that I've got thousands to pay off?

Thanks!

Posted by imelda at March 8, 2006 02:31 PM

2.: Great site, Ramit.

It is important for college students to start building credit while they're still in school. I came out of college with no debt (I had no loans), and no credit. I had one credit card that was linked to my parents' account, so it wasn't helping me. Creditors had no history for me, so they wouldn't give me any credit even after I had graduated and was making a significant salary. I couldn't even get a credit card at Guitar Center to buy the $600 bass guitar I wanted. I had the cash, but just wanted to open a line of credit. They wouldn't approve me, so I had to pay in cash. Never had any bad credit - no missed bill payments or anything, but I just couldn't get any credit. I tried to go into Men's Warehouse to buy some clothes for my new job coming out of college, but I couldn't get approved there either (Once again, I had the cash to pay for the stuff, but wanted to try to get a card, since that's what people were advising me to do - try for a store card, they'll accept you. RIGHT.)

I had to have some help to get started... Now I have great credit, but it sure was a PITA leaving college with NO CREDIT HISTORY... After getting a co-signer for a line of credit to buy a TV and a co-signer on a car loan, things started to turn around. Once I got a mortgage and paid off a car loan, things REALLY turned around. Now I get so many offers, it's freaking annoying. (couldn't have gotten a mortgage or car loan without my wife's help)

I was a little miffed with my parents for not teaching me that I would need a credit history of some sort. They thought I should be fine, though, since I had no debt. Not the case... I would have been better off if I would have gotten one or two of those crappy college card offers. At least I'd have been accepted and they would have had some sort of record of me.

I'd like to encourage parents that might read this to start helping your children build a credit history early - even before college begins. If your kid can have a job in high school, then teach them to pay off a credit card at the end of the month. Help them get a low-limit card in their name, and keep tabs on what they do with it. If you buy them a car with a loan, get them to co-sign on it with you, or something like that. It really will help them later on down the line.

Posted by JB at May 15, 2006 01:48 PM

3.: why don't they have a credit card that works like a debit card, so that you can build credit but never buy something you can't afford, eh??

Posted by arjun at May 20, 2006 09:37 PM

4.: wow, yeah - just when the posting couldn't get any dumber, we have comments about being miffed at your parents for not getting you heavily and needlessly into debt as a young person.

Its called manual underwriting - and the federal government says that a person with no credit who pays their landlord early or on time for two years can get the same exact same interest rate on a mortgage as someone with 'perfect credit' who gets financed via FICO score lending.

And if you needed a co-signer to buy a TV (there a highpoint), then maybe you couldn't afford the TV. Debt is a means of overspending. Rammy points this out beautifly in the post - "with a credit card you could have $0.00 in your bank account and you'd still be able to spend." Maybe with $0 in your account you should hmmm, stop spending. So the best part - thats why its in bold - is the command "Bottom line: Credit cards are free loans if you pay your monthly balance. If you can't pay it off by the end of the month, don't buy it". So how exactly do you do that with say, the aforementioned $0 in your account?

The summery here: a credit card is an easy means of overspending and going into debt for your daily purchases. This will build your credit so that you can later go deeply in debt and buy really big things that you can't afford. You don't need them, the majority of Americans don't pay them off, and a bunch of zero balance credit cards will actually hurt you when you apply for a mortgage because they see you as an accident waiting to happen.

Posted by debt-free at July 3, 2006 07:49 AM

5.: It is a common misconception that it is actually hard to get a credit card. If you need a credit card for your special purposes, in the worst case scenerio most banks allow you to have a credit card that is secured against a saving account. Basically what that means is that the credit limit of the credit card is the same amount as the amount in the savings account. Thereby the bank sees no credit risk and thus will be more than happy to offer you a credit card.

Mind you, this option should be left to the last, after you have exhausted all other options. This is because you have to put away a large amount of money in a savings account that does not attract significant interest as security for the credit line. Also bear in mind that this saving account cannot be touched and is effectively locked.

Posted by Credit Release at July 28, 2006 02:56 AM

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