Congratulations, you just got approved for your first credit card! When used properly, credit cards can be a great spending tool. But there are plenty of ways new cardholders can get carried away and make poor financial decisions that will affect them for years to come. We interviewed Kate Walker, vice president for finance and treasurer of Grinnell College, about how smart choices now can affect one’s credit score and credit report in the future. Walker teaches financial literacy to groups of Posse Scholars — students with extraordinary academic and leadership potential who may be overlooked by traditional college recruiting methods.
Q. What advice do you have for someone who just got their first credit card? What can they do to build their credit score?
A. The answer to both of these questions is the same: Pay off your credit card balance on time and in full every month. This practice will accomplish two important things. It will build your credit score and it will avoid the perils of credit card debt.
It's all too easy to pay for something with a credit card when you don't have adequate funds to cover the purchase. Don't do it. That's how credit card debt begins. Be disciplined in how you use your credit card. Don't overestimate your ability to pay your balance. Resist the temptation to charge more than you can cover each month after you pay for other necessities such as groceries, rent and clothing.
Once you're caught up in the credit card debt spiral, it's hard to escape. There's a lot of press about the expense of student loans, but credit card balances are a far more expensive form of "loan," with interest rates and payment terms that are much more demanding than student loans.
Use your credit cards responsibly. Charge only what you can pay for. Always pay off your credit card balance on time and in full every month. Over time, these practices will help you build a solid credit score. Then, when it comes time to take out a mortgage or a car loan, your good credit will allow you to get a lower interest rate. That's a very valuable reward for responsible use of your credit cards.
Q. Are there certain things new cardholders (or anyone, really) shouldn't use a credit card for? Why?
A. First, never use a credit card for a purchase that you can't pay for in full the next billing cycle. If you don't have the money to buy something, don't use your credit card. If you can't pay for something in full one month later, don't buy it. Restrain yourself. Avoid the temptation of instant gratification. It's hard, but you'll thank yourself later. Interest rates on credit card debt are exceptionally high — 10 percent, 15 percent, 20 percent, even 25 percent. That makes your purchase far more expensive than the price you paid. You can avoid the added interest expense, though, if you pay the balance in full when you receive the bill.
Second, never use your credit card to withdraw cash. From the moment those dollars are in your hands, they cost you much, much more than their face value because interest on cash withdrawals typically begins immediately. Credit card cash withdrawals are incredibly expensive and the money disappears quickly, often without delivering any tangible value. No matter how desperate you may feel, you should never indulge the temptation to use your credit card to withdraw cash.
Kate Walker is vice president for finance and treasurer of Grinnell College.