The truth is, opening a credit card is some of the best advice you’ll ever get in your life, right up there with wearing sunscreen and not eating before bed.
Credit cards are often sent to young adults with inserts touting the benefits of having one, but the fine print, jargon and unknown acronyms are what you actually need to pay attention to. Owning a credit card is a responsibility and having one with a good interest rate is a privilege.
Consider credit cards as a loan to you from the bank you choose to do business. Debit cards work differently – payments with a debit card are drawn directly from your bank account, while credit cards purchases need to be paid off.
Credit card payments are due on a monthly basis and need to be paid promptly. Interest rates begin to accrue not at the end of the month, but at the end of the grace period, which means that you’re only paying what you spent.
Money that you put into the bank compounds by the interest rate that the bank offers on savings accounts. If you have a savings account, you’re getting some percentage of interest for keeping your money in the bank, albeit a small amount.
For college students, often the only thing growing financially is student debt. But taking a refund check or monetary gift from a relative and opening an account with the money could prove an exercise in smart banking. The money will eventually begin compounding upon itself, and after several years you will have more money than you put in – even if you don’t add to the account at all.
According to US News, “The longer money compounds the faster it grows. Money growing at 6 percent per year will double in about 12 years, but it will be worth four times as much in 24 years.”
Every time you spend money using the debit card, the money you can gain from interest decreases, just like in your savings account.
Which brings up opportunity cost, which is essentially saying what you stand to lose by doing one thing instead of another. For example, the opportunity cost of using debit over credit is the interest you make on what’s in your account.
Credit cards require a high degree of self-control. Holders need to make sure they pay off their purchases in a timely manner in order to avoid high accruements in interest rates. Per US News, credit cards compound interest against you, so it is in your best interest to pay off the purchases as soon as possible.
The opportunity cost of using a credit card is the interest rates that you would have to make should you miss a payment, which would be insanely high considering most college students are offered interest rates in the realm of 20 percent.
Still, opening a credit card is a good way to save money and an even better way to build a sense of responsibility. It also helps build your credit – so long as your payments are not perpetually late – which will help facilitate future large purchases like a house or a car.
If you were to be responsible with a a high-interest rate credit card, lenders would throw cards at you, which then gives you the privilege of choosing the lowest interest rate that comes your way.
It could be said that credit cards have been given a bad rap, but, as with most things in life, it comes down to what you do with it.
Kenneth Kashif Thomas is the arts editor and can be reached at kenneth.thomas@ubspectrum.com
