What To Expect When You Turn 18
Ah, 18. It’s a magical time where numerous doors open: the ability to vote, marry, buy real estate or stocks, and sue! That’s not all that happens, though. You also get a wave of credit card offers in the mail.
Credit cards offer unparalleled freedom, but they also come with the risk of heavy interest and debt. In 2018, Americans paid roughly $113 billion in interest on credit cards alone. Yikes. Fortunately, you don’t have to be a part of this statistic if you follow the right steps.
But first, let’s tackle the basics.
Why Would a High School Student Want a Credit Card?
First things first, why would a high school student want a credit card? Well, there are quite a few good reasons for having one, actually. (There are also a few bad ones.)
The good: with a credit card you have more spending power, meaning you can afford larger items that you can then pay off over time. You could also establish your credit score, allowing you to take out a car or home loan later in life, if things go well! Lastly, you could earn great rewards from using the right credit cards, including cash back or free fuel.
The bad: with that increased spending power comes an increased risk of going into debt or bankrupting yourself. This, as well as poor credit utilization in general, can lead to your score going down, making those home and auto loans even harder to attain.
Essentially, credit cards are very much a double-edged sword. As much as they work for you, they can work against you if you’re not careful. A big part of this comes from understanding the primary differences between credit and debit.
Credit vs Debit Card
On the surface, a credit card and debit card look very much the same. They even function similarly: you swipe them and then things are yours. This is where the similarities end.
A debit card pulls directly from your checking account. This means you can only spend as much as you have, then you’re out of luck. A credit card isn’t linked to your bank account, but instead runs on a line of credit. Your credit limit will be determined by the creditor, but can exceed the amount of actual money you have.
In short, you can spend more than you have if your credit limit allows. Yikes!
Credit Terms to Know
Few worlds are as confusing as the world of credit. (Unless we’re talking “Game of Thrones.”) There are several terms that you should know before entering the credit arena, otherwise it’s easy to get caught up in the language and fall for the wrong card. Know the following terms and you’ll be ready for the best and worst of the credit world!
Annual Percentage Rate: The annual percentage rate, or APR, is how much interest you’ll pay on your card every year. The higher the rate, the more you’ll pay.
Cashback: Many credit cards offer a cashback reward system. With a cashback card you earn a percentage of all your purchases back as credit on the card. You can save these rewards up and bank them all at once, or use them in pieces to cover smaller purchases.
Secured Card: A secured card requires a deposit be made and kept in an account as collateral for the card. Think of this as a safeguard in the event you can’t pay your balance, which is equal to the deposit you originally made. This way, if you can’t make a payment, your deposit can simply cover the balance.
Revolving Credit: Any credit that allows you to pay off a part of it and resume spending is revolving credit. This makes nearly every credit card a form of revolving credit. This can be great for having increased spending power, but also leaves you more susceptible to debt.
Dispute: A credit card dispute is when you file a claim against a purchase made with your card. This can be great at protecting you from fraud, as any claim you file and prove to be true can be removed most of the time.
Are all Credit Cards the Same?
You know how credit cards function, you know what some of the perks are, but are all credit cards the same?
You guessed it: it’s complicated.
There’s a nearly endless offering of credit cards, each one with different perks, rates, fees, and so on. Rather than list out several thousand credit cards, let’s take a look at what you should factor into your decision to pick one card over another.
What to Look for in a Credit Card
Sure, credit cards are varied and complicated. That being said, there are a few key areas you can focus on to narrow down your choices and avoid picking the wrong card.
What kinds of rewards does the card offer? A lot of cards will offer cashback on all purchases, while some will give you a more aggressive percentage on a single type of purchase, like gas or groceries for example.
Think about the type of reward that would be most beneficial to you when looking over your potential credit cards. If a card isn’t offering any outstanding rewards, consider passing on it and wait until something better comes along.
Despite the word “annual” in APR, you will actually accrue interest every single day.
So, if your card has a 20% APR, you actually pay 0.0547 percent interest every single day on that month’s balance. (To determine what your daily interest will look like, take the APR you’re presented with and divide it by 365.)
It can be tempting to take a card with a nice cashback or reward system, but pay close attention to the APR being offered. The overall average APR for credit cards in 2019 is 14.14 percent, but don’t be surprised if you’re offered something closer to 17-22 percent, seeing as you’re new with credit.
Some credit cards carry an annual fee on top of the APR. That’s right: you pay for simply having the card. As a new credit holder, you may want to think twice before pursuing a card with an annual fee.
Some cards with annual fees will have a great APR or offer significant rewards, but again, that annual fee can be a killer. Seeing as you’re new to credit, you’ll likely be stuck with a slightly higher APR, making these types of cards even less desirable.
How Do You Build Credit When You Don’t Have Credit?
If a credit card is the person at the dance you’re trying to impress, then your credit score is how sweet your moves are. The higher your score, the more impressive you are to creditors.
So, can you even build credit when you don’t have any credit score? It’s a little tricky, but not impossible.
- Become an authorized user on someone’s card: If you have a family member or very close friend that’s willing, see if you can become an authorized user on their card. This will enable you to use their line of credit as well, meaning you also earn credit for that line. This is a double-edged sword, however, as either one of you can tank the other’s score if spending gets out of hand.
- Get a secured credit card: A secured card requires a deposit to the bank that’s kept on hand as collateral. These cards typically have a lower barrier of entry, making them more attainable for those with little or no credit score. The only downside being you have to make that upfront deposit, which also dictates your limit.
- Apply for a loan with a cosigner: That trusted friend or family member could also cosign a loan for you. This will make them accountable if you default on the loan, so make sure you pay the loan on time. Loans generally have a better APR than a credit card, so they can be a great way to build your credit score without breaking the bank.
- Look into student credit cards: Student cards generally have a high APR and low limit. Despite this, they can be a great way to build your credit score without the risk of a high-limit card. Many of them offer benefits for good grades, too!
Credit Card Pitfalls and Red Flags
You know the terms, you know the perks, now it’s time to learn about red flags to look out for during credit card choosing time.
- Super high interest: It’s not uncommon for your first credit card to have an interest rate of 17 percent or more. If you’re looking over a card and they’re advertising something in the upper 20s? Run for the hills and find a different card.
- Incomplete reporting: Credit cards should report to a major credit bureau. If a card isn’t reporting to a major agency, you aren’t getting the most out of your card and your score isn’t benefiting as much as it could.
- Numerous fees: It’s common to have late fees if you don’t make a minimum payment on your card, and again, some cards have an annual fee. Anything beyond this should be a red flag.
- Nowhere to go: If you have no credit or a bad score, a secured credit card or other type of entry-level card should offer room for improvement. For example, some secured cards will give you the chance to obtain an unsecured card after a set period if you make payments on time.
Your Credit Card Must-Have and Safety Checklist
There’s a lot to keep in mind when looking for your first credit card. To help with your credit search, here’s a handy checklist that’s full of advice on picking a decent card, terms to remember, and tips on building your credit as time goes on!
Enjoying the Freedom of a Credit Card
Credit cards could pave the way for a more financially sound future. They could lead to great mortgage rates on a home, lower interest rates on your first new car, or healthy sums of money as cashback. In short, credit cards can provide tons of financial freedom.
Don’t let the scary reputation of credit cards frighten you off. Study up, memorize the important terms, and don’t fall for the first card you’re presented with. We’re fortunate enough to live in an age where there are numerous options available online, so don’t let the first offer be your only offer. Give yourself a little more credit than that.
Additional Credit Card Resources
- TheBalance – Free Credit Monitoring
- America’s Debt Help Org
- InCharge Debt Solutions
- Consumer Financial Protection Bureau