Learning about Credit and Credit Cards – GradPlan

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Learning about Credit and Credit Cards

All the information you need to know about credit, and how to use it

What is credit and how can you build it?

Credit is a measurement of how likely you are to pay back money that you borrow. The higher your credit score, the more likely a lender will believe that you will pay back the money you borrow on time. If you have a lower credit score, the lender may not want to lend money to you.

There is a long process to building “good credit” which can include the following factors:

  • The number of credit accounts you have open
  • How much money you owe on each of those accounts
  • How often you make your payments on time
  • Any late payments or missed payments are bad
  • The amount of money you make through working

Why does credit matter? 

Having “good credit” can be essential when it comes to renting an apartment, or taking out a loan to purchase a car. The landlord or the car dealer wants to feel comfortable knowing that you will pay your rent, or make your car payment on time. A good credit score tells them that you are more likely to do that.

At the same time, a lower credit score can stand in your way of taking these steps, so it’s important to understand the terms of any credit agreement you enter and make your payments on time.

What else to know about credit?

Credit and credit cards are serious things and shouldn’t be taken lightly. So the more information you can know about credit the better. Here is the key information we think you should know before engaging with anything related to credit.

1. The Vocabulary of Credit

Here are 3 important terms to know:

A Credit Limit is the maximum amount of money you can borrow on that credit card.

Interest is the fee you pay to borrow money. A lower interest rate means the fee to borrow money is lower.

Annual Fee is a charge applied to your account each year for simply owning the credit card.

2. Understanding Credit Cards

A credit card is a card you get that you can use to purchase goods on “credit” – meaning you will pay the amount of money due at a later time (usually at the end of the month).

You have to be at least 18 to get a credit card, but unless you are a college-enrolled student, most credit card options aren’t available until you’re 21.

There are many different types of credit cards; some are even uniquely geared toward college students or those starting their credit journey.

3. Types of Credit Cards

There are several different types of credit cards you can apply for. Here are some options:

 

Secured Credit Cards are similar to debit cards. You are required to send a deposit to your credit card company and you can only spend the amount you deposited!

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Pros

Easiest card to get approved for. You can upgrade to an unsecured card (regular credit card) if you keep up with your payments.

Cons 

The interest rate is usually high and the credit limit (how much you can spend) is low.

Student Credit Cards are geared toward students so chances of approval are high.

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Pros

You’re able to independently practice using a credit card.

Cons

The interest rate tends to be higher and the credit limit is lower than other options.

Become an Authorized User on a credit card owned by a parent or individual that you trust who uses their credit wisely.

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Pros: 

Even if you don’t make any purchases, your credit score can still increase by just being an authorized user.

Cons:  

Not every credit card company reports authorized users to the credit bureau so depending on the card, your credit score may not increase.

Before getting a credit card ask yourself: 

  1. How much can I realistically afford to pay off each month?
  2. How will I remember to make my payments on time?
  3. How will I decide what to purchase with my credit card vs. cash?
  4. Do I have savings to use to pay off my card, if I fall short on income?

And a few last tips for managing your credit: 

  • Avoid Interest Charges by:
    • Only spending what you can realistically afford to pay off each month; and,
    • Paying your card off in full at the end of each month.
  • Wait until you have a job before getting a credit card; you don’t want debt with no way to pay it back.
  • Use less than 30% of your credit. If your credit limit is $1000, try to use only up to $300.
  • Track your spending!!
  • Advocate for yourself: If you accidentally miss a payment deadline and get a late fee, make your payment right away, then call your credit card company and ask they remove your late fee.
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Malcolm X, human rights activist