For college students, especially Wahoos, credit cards are a smart choice. It’s easy to get caught up in the notion that credit cards are to be avoided because of 19 percent interest rates and the millions of Americans who have overdosed on debt; however, as with many financial products, there are effective and ineffective ways to use them. Take mutual funds, for example. Many Americans hear investing their savings in mutual funds is a good idea and — without learning investment fundamentals — pick load mutual funds that yield mediocre returns and high expenses. Then, when their annual statements arrive, they are puzzled why their neighbors have been able to reap double-digit returns in their retirement accounts while their investments have gone nowhere or tanked amid the collapse of a market bubble. The same is true with credit cards. Financial institutions are offering a great product and counting on uninformed users to screw up, driving the firm’s revenue. Hopefully, University students will be among the informed who take full advantage of credit cards.
Before mentioning the many advantages credit cards offer, there is one caveat — for those who carry a balance, the costs to your financial health far outweigh any of the benefits. That said, for those who pay the balance in full each month, credit cards are short-term, interest-free loans to be repaid within 30 days that offer you convenience, protection, insurance coverage, rewards points or cash back and, most importantly, the opportunity to build credit.
Most students readily understand the convenience factor of credit cards, as well as the rewards programs many offer. An element many students overlook is the protection factor. Credit card purchases are protected by law under the Fair Credit Billing Act. This law gives the consumer the right to withhold payment on poor-quality or damaged merchandise purchased with a credit card. If your card is stolen, you’re liable for no more than $50 for unauthorized charges. In an effort to attract customers, credit card companies are often more generous and offer “zero liability,” so you aren’t responsible for any amount.
This protection is surprisingly useful. For starters, if a thief steals your wallet, your liability is far lower than with cash. If you buy an item on eBay and what you receive is different from what’s listed or becomes damaged after a week of use, you can dispute the charge, which is particularly helpful if the seller insists it’s your fault. For these protection reasons, it’s important that students always use a credit card when making purchases online. With a check or debit card, the money is coming straight from your account, not the bank’s, leaving you in a less advantageous position to dispute charges. Liability protection on debit cards is also less generous, as your liability limit jumps to $500 or more if you delay notifying the issuer for more than two business days upon discovery of the loss or theft. In his book “How to Be More Credit Card and Debit Smart,” Scott Bilker explained, “I try to buy everything with a credit card. I hate using cash or debit, because if something happens, it’s gone. With credit cards, the bank’s money is gone.” As an added incentive, many credit cards offer free car-rental insurance, travel accident insurance, emergency assistance and extended warranties for purchases made with the card.
The most important reason to use credit cards for college students is to build credit history and raise your credit score. Your credit score, also known as FICO score, is between 350 and 850. It determines your creditworthiness based on punctuality of payment in the past, the percent of available credit used, length of credit history, types of credit used and recent searches for credit. Your FICO score is used by banks as a factor in lending decisions. In the case of a low credit score, banks may deny credit, charge higher interest rates, demand more collateral or require more extensive income and asset verification. At age 18, you start with no credit history. By using credit cards and paying the balance in full each month, you can raise your FICO score to more than 750 while still in college, leaving you in an optimal situation when taking out a loan for graduate school, a home mortgage or a car. Besides paying the balance, students should also be careful not to apply for too many credit cards or use more than 30 percent of the credit limit on their cards. Doing either will adversely affect their FICO scores, especially for students with short credit histories.
With regard to choosing a credit card, it’s best to go with Visa or MasterCard and select a card with no annual fee as well as a rewards program that offers at least 1 percent back. With the right card and an informed mindset, there’s no reason why all University students shouldn’t take full advantage of credit cards.
Rahul Gorawara is a second-year economics major. He can be reached at gorawara@virginia.edu.
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