The Tuesday Q&A: Do I Need a Credit Card?

MBA FAQ, MBA frequently asked questions, bschool questions, mba questions

Question:

I’m going to college in the U.S. this fall and haven’t lived on my own before.  Should I get a credit card?

Answer:

In the U.S. there’s an old saying that says, “Cash is King.” Anyone who’s ever played chess knows that while the king is the most important piece, the queen is the most powerful. If “Cash is King,” then “Credit is Queen.” Life in the States relies on credit in a big way, and a good credit score gives you access to everything from renting an apartment to buying a car to getting business and home loans at low interest rates.The only way to get a good credit score is to build a good credit history, and for the majority of people that starts in college.

With terms like APR, balance transfer, rewards programs, and fraud protection whizzing by your head, things can get confusing quickly. The basic idea behind a credit card is that a bank or credit union gives a cardholder (that’s you) a card that allows you to buy things now and pay for them later. Simple as that. If you pay off your credit balance before your monthly statement, you don’t get charged interest. If you have a balance on your credit card at the end of the month, the credit card company charges you interest on your outstanding balance (meaning that you will end up paying MORE for that money).

And that’s where it gets tricky. Most credit cards for first-time cardholders have high interest rates (sometimes over 30%), so things can get very expensive, VERY quickly. Over the years, banking regulations have made it harder for college students to have access to big lines of credit, but this is still the most common cause of bad credit amongst young people. At the same time, if you don’t start building a credit history, things are going to be MUCH tougher for you after you get out of school and start making larger purchases.

So, what do you do?

Yes, you should get a credit card. But now comes a very, very, VERY important rule to follow.

The most important thing to remember is this: don’t spend money you don’t have. But wait, isn’t that what a credit card is all about? Actually, no. If you can’t keep up with the minimum monthly payments on your credit cards, you will rack up huge interest fees and could end up actually lowering your credit score. The key here is to only charge small, everyday purchases to your card. Groceries, gas, your Netflix subscription. That way, you can easily pay those balances off every month, which will build your credit history and keep you from splurging on big-ticket items or shopping sprees.

Remember, unless it’s a REAL emergency, the card should just stand in place of money you normally have and can spend.

So, yes to a credit card. Just be careful. DON’T sign up for any old card. Do your research – you want to know exactly what you’re signing up for before you sign up!

— Jon Frank

Double Majoring: Worth it?