Credit Card Primer

Credit cards, and credit in general often lie in a realm of mystery for many college students and young adults. It is sometimes feared because of the crisis of 2008, and its continuing aftershocks. In this post, I, and Zitong want to help explain how credit cards in particular can be used effectively, responsibly, and perhaps most importantly, (for us at least) to help you travel.

Credit Score



Each person who uses an American based credit card, takes out an American loan, applies for a loan, or in almost any way, borrows money has a credit score. This score shows borrowers your credit history, maturity of accounts, and myriad other factors. From this score and accompanying credit report, borrowers can evaluate the risk involved in lending you money. There are three main credit agencies that produce credit reports: Equifax, Experian, and TransUnion. The most widely used scoring formula is the FICO credit score, although many institutions have developed their own.

FICO scores range between 300 and 850. The factors that affect FICO credit scores are:

 

FICO Score Chart
Source

 

FICO Score Credit Range
Source

From the chart, it is easy to see that payment history is by far the most important factor, quickly followed by amounts owed. Length of credit history is a smaller, but still meaningful factor. Students should likely start trying to build an impeccable credit score now, so loans are easier to obtain in the future after college. One way to build a credit history is to simply maintain one credit card that is paid off every month. Over time, this will pay off handsomely.

Applying for Cards

You can apply for credit cards online, over the phone, and in-branch. Online is the easiest, and often yields a result in a few minutes. You need to enter your Social Security Number, annual income, monthly housing cost, and a few other basic pieces of information.

If you are instantly approved, it will tell you, and your card will come in the mail within 7-10 business days. If you are denied or pending, there is still something that you can do. You can call the reconsideration line within the lending institution to see if there’s something that you can do in order to still get the card. Always be as polite as possible with the representatives. Sometimes, they will truly go out of their way to help you if you’re calm and respectful.

Although some aspects of the application are not verified, never lie on a credit application. If the institution finds that out, they will delete your account, confiscate all rewards, and penalize your credit history, at best.

For Non-U.S. Person (neither U.S. Citizen nor Permanent Resident)

Even if you are not a US Citizen or Permanent Resident, you can still enjoy all the credit card benefits that others can. However, do keep a few things in mind when applying:

  • Your credit history will stay with you for your whole life, even if you don’t have a Social Security Number (SSN). So mind your credit history carefully (if you still want to go back to the US in the future).
  • Although an SSN is not necessary, your options are limited without it. We recommend that you obtain an SSN as soon as possible.
  • As an international student with an F1 visa, the easiest way to get an SSN is working  an on-campus job.
  • As mentioned above, applying online is often the best option. However, as a non-U.S. Citizen, you can’t apply for cards online with certain banks (e.g. Bank of America). You must go to a branch and apply in-person. (In doing so, you may be denied the Welcome Bonus. Always remember to check with your banker about this before officially applying.)

Credit Card Use

Credit cards are used mainly for the convenience and safety of not having to carry large amounts of cash. They can also be used to purchase items before you have the money to pay for them. Each purchase is a small short term loan that the bank expects you to pay off at the end of the statement cycle. While you can carry a balance over, the interest rates on credit cards are usually very high, notwithstanding the fact that a carried balance hurts your credit score. You should pay off your full balance whenever it is financially possible.

A good rule of thumb is that you should never purchase something on a credit card unless you can pay it off immediately. To effectively use a card, it should be constantly treated as cash, just like a debit card.

Rewards

Many credit cards come with some kind of rewards system, be it cash-back, proprietary points systems, or airline miles. Ordinarily, these points add up to only a fringe benefit, based primarily on what you would normally spend on ordinary things as well as travel. Lucrative sign-up bonuses change the calculus.

To acquire the bonus, you must spend an arbitrary minimum amount within a certain amount of time (~3 months). For lower level cards, it is usually around $1,500, and for higher level between $4,000 and $5,000.

The rewards can be used in a variety of ways, the most lucrative of which, are travel-related. For more on different credit cards, and how to use the rewards, go here.

Spend

That minimum amount required to receive the bonus is known as minimum spend. You might be saying to yourself, that’s great and all, but I don’t spend $4,000 in a year, let alone a month. The first thing to do is to shift as much spending as possible to your credit card. All manner of things can be charged including, rent, utility bills, eBay purchases, and sometimes college tuition. If you have a large purchase coming up, make sure and put that on the new card. Keeping close track of your spending makes it easier to maximize rewards and stay under budget.

Other avenues do exist, though. There is something called manufactured spend (MS). This is where a card user buys items that have cash value, or can be redeemed for cash. This could include gift cards, Amazon account credit, and Venmo transfers. I neither condemn nor condone manufactured spending. If you choose to do it, be aware that there are consequences if the bank decides you have been abusing their system.

Conclusion


Credit cards are useful not only for their convenience, but also their ability to help build your credit score for the future. When used strategically they can reward you greatly with travel and other perks. That said, they also carry a great amount of risk when not used properly. Strict budgeting and self control must be exercised at all times. Spend only what you can afford to. Always try to avoid carrying a balance over, and if you ever do get into credit card debt, try to pay it off as quickly as possible because of its higher relative interest rate to other forms of debt.

Good luck, and many travels!

Read the next article in the series: Credit Cards for Beginners

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