Graduate students have a pretty good handle on financial literacy topics like credit cards. In fact, 85% of graduate students have a credit card (Council of Graduate Schools’ Financial Education). But it’s one thing to understand how credit cards work and another to actually practice perfect credit card usage.
When I signed up for my first credit card after college, I thought of it as a form of an emergency fund. While I never ended up carrying a balance, on a couple occasions I used it to push paying for an expense from one month to the next. I thought I was being responsible by choosing a credit card with a relatively low interest rate (only 10%!) in case I did ever carry a balance.
With a lot more financial savvy and years of experience under my belt now, I can appreciate both the benefits and dangers of credit cards. If you follow the rules of perfect usage, credit cards can serve you well and benefit your life in small ways. But if you deviate from perfect usage, credit cards can bite – and it could be a tiny nip or a scarring chomp. The downside potential is definitely larger than the upside potential, so you must toe the line carefully!
Further reading: Don’t Buy into the Pro- or Anti-Credit Card Hype
Here’s how to use a credit card perfectly so it never bites you.
Have a credit card
It is a good idea to have a credit card as (when used perfectly) it will benefit your credit report and score. If you have never had any debt, opening a credit card will generate a credit report and score for you. (Make sure your first credit card is one you can keep open indefinitely, as it will establish the beginning of your credit history.) If you already have a credit score due to installment debt, such as student loans or a car loan, adding a revolving debt like a credit card will increase your score.
The main reason to have a high credit score is to obtain favorable terms when you take out new debt, such as a mortgage. (The time to be concerned about maximizing your credit score is when you’re approaching taking out new debt, but other than that it’s not a big concern.) Some landlords also check credit scores, so a good score can be beneficial to a renter.
Further reading: 7 Ways to Improve Your Credit Score
If you have ever failed to make payments on a debt or have carried a credit card balance, don’t use a credit card. Give yourself time (at least a year) to ingrain good financial habits using only a debit card before returning to credit.
Never pay interest or fees
Your credit card should never cost you any money. Perfect use of a credit card means that you never carry a balance or pay any kind of fee (with one possible exception).
Pay off the entire balance by the due date
To avoid ever paying interest on your credit card, you must pay off the balance in full by the due date.
42% of graduate students with credit cards carry a balance on their credit cards, and 9% only make the minimum payment (Council of Graduate Schools’ Financial Education)! These students are paying a ridiculously high interest rate (15% on average) on this debt, which in many cases could be avoided entirely by better money management practices. With credit card debt, compound interest works against you with amazing ferocity.
Make it an unbreakable rule to always pay off your entire credit card balance before the due date; it’s a slippery slope from allowing a balance to carry over in one month to being saddled with thousands or tens of thousands of dollars in credit card debt that just keeps growing. The average American household with credit card debt has a balance of $16,425. Having this rule in place will force you to get creative about ways to cut your spending or earn extra money before the deadline.
A great way to make sure that you never miss a payment and incur a late fee or interest charges is to set up your card to auto-pay the entire balance before the due date. Just make sure that you always have enough money in your checking account to cover your credit card bill or you risk getting slapped with a fee by your bank instead.
Don’t Spend Ahead of Your Income
To use your credit card(s) perfectly, though, you have to go a step further. It’s not quite enough to pay off your credit cards when they are due. If you get sloppy with this practice, your spending can actually get ahead of your earning by 1-2 months, which can really put you in a bind if an emergency occurs.
To use a credit card perfectly, treat it like a debit card: only spend money that you already have in the bank, not money you expect to receive before the bill is due. That means that you will earn money, then get paid, then spend the money. To keep your credit card bill in sync with your budget, pay it off in full at the end of every month/budgeting period. You could even pay it off a couple times each month to keep your utilization ratio low.
Further reading: Living on Time with Your Credit Cards
Gain Benefits and Rewards… But Don’t Go Crazy
All the points above are about avoiding the downsides of credit cards, but now we get to the fun part – the upsides!
Credit cards are safer than debit cards for fraud protection, and they also often confer benefits in the small print like rental car insurance.
But the really big draw is the rewards. When you have a good credit score, you will be eligible for all kinds of rewards credit cards. These rewards come in the form of a signup bonus (usually after meeting a minimum spending requirement), ongoing rewards based on your spending, or both. Credit card rewards are actually one of the top ways my husband and I ‘saved’ money while we were in grad school, even though we rarely spent enough to meet minimum spending requirements.
Signing up for credit cards for the bonuses and strategically using certain cards for certain purchases to rack up points is a great way to score some free money or free travel. But you can’t get so caught up in the bonuses that you overspend or deviate from perfect use.
Credit card companies use rewards to prey on your psychology. The rewards make spending feel even better than it normally does, so you’re more likely to spend lots of money on their particular card. In that way, the company gets the transaction fees from the merchant plus a greater chance that you will overspend, not be able to pay off your balance, and end up paying interest.
If you want to go after credit card rewards, great. Just put in place strict boundaries such as a budget to constrain your spending, the habit of paying off your card every month, and autopay. If you juggle multiple cards at once, consider signing up for account aggregating software like Mint or You Need a Budget to help you keep track.
I said earlier that you should never pay a fee for a credit card. The one exception is a fee for a rewards credit card when you are dead certain that you will gain more in rewards than you are paying in an annual fee. If you’re at all unsure about the ROI of the fee, don’t get the card. A credit card with a fee should also not be the first credit card you open (or probably your first rewards card, either) as you should feel free to close it whenever paying the fee no longer makes sense. If that is your oldest credit card, your credit might take a small hit upon its closure.
If you’re going to use a credit card, use it perfectly. Credit card fees and interest are too detrimental to your financial health to play around with! Just treat your credit card like a debit card and you’ll be fine.