Column by Amanda Smith, Illustration by Grace Dooley
Amidst the uncertain times of the COVID-19 pandemic, many spenders are looking to their credit cards to keep them from draining bank accounts while awaiting stimulus checks. College students (most of which are excluded from the recent stimulus bill) feel stuck as they consider ways to manage their finances during this global crisis.
Personal finance guru Dave Ramsey boldly claims that, “The only thing [credit cards] can truly give you is a life of debt, monthly payments, annual fees and sky-high interest rates.” While this may be true for some, it’s worthwhile to determine if using a credit card as a college student is the right choice on an individual level, especially when special circumstances are thrown into the mix.
Length of credit history comprises 15% of your credit score. This can work for or against you, but is not a fact to be dismissed. For the 45% of Americans who pay off their balances in full each month, this is great news. For the majority, however, extreme caution and discretion is advised. If you don’t forsee yourself paying off your credit card debt for months, or years, you may want to look into other options.
On a positive note, credit cards often offer cash back rewards, so taking advantage of this early and responsibly could lead to significant savings over time. Some financial institutions even reward good grades. Additionally, making purchases online is more secure with credit cards because it minimizes the chance of losing all of the money you’ve already earned in your existing accounts.
It is important to keep in mind the dangerous qualities of credit cards as well. Researchers at Carnegie Mellon, Stanford and MIT conducted a study where they found that the brain responds differently to using cash or plastic forms of payment. From this, they concluded that it “hurts” more to pay with physical dollar bills than a credit card. This can lead consumers to spend excessively, giving less thought to their purchases on credit.
The most threatening downside of credit cards is the ease of quickly accumulating debt with high interest rates for the sake of immediate need or gratification. Many consumers mistakenly think that paying off the minimum amount required at the end of each month is sufficient, but this allows debt to snowball and compound interest to work against you.
To form a personal safety net, consider starting with a credit card with a small maximum limit. This will help form responsible spending habits. Also remember to monitor your credit score to be aware of potential identity theft.
For college students who decide to get a credit card, consider using Discover. Discover it Student Cash Back has been consistently ranked by US News as the best student credit card for its $0 annual fee and $20 statement credit each school year for students with a GPA of 3.0 or higher.
Using a credit card in college can allow students to build up savings early or form the foundation for a life of debt. It can build a strong credit score or damage your credit score before you apply for your first loan. It can also, in some cases, get you through uncertain times.