What is credit?
Buying things on credit essentially means that you are buying things on a temporary loan. You are given a limit (e.g., $500) and at the end of a billing cycle (usually 30 days) you are expected to pay back the full balance.

Why is a credit history important?
Your credit history is the primary determinant of your “credit worthiness” when it comes time to take out a loan or apply for a credit card. In the future, or even now, you may need to take out a loan: for a car, your education, a computer, or perhaps even a house. Your credit history is important because it forecasts how reliably you can make payments. All past credit payments, along with detailed records of late payments, minimum monthly payments, unpaid balances, and more, appear on your credit history.

What happens if you do not pay?
If you can’t manage to make your minimum credit card payments, your chances of obtaining loans in the future will be greatly compromised. This means it will be more difficult for you to take out a loan to buy a house, car, or even computer. Credit cards may also be hard to obtain. Therefore, it’s important to track all of your credit purchases and the balance in your bank account just as you would with other purchases. If you are repeatedly delinquent in your payments, you will ordinarily be sent to a collection agency that will continuously contact you to try to get payment.

What is APR?
APR stands for Annual Percentage Rate; this is the interest rate that you pay on late payments on your credit card. Since credit card companies target low income college students, they often advertise a “low introductory APR” or “no annual fee.” However, in many cases, while the introductory APR may be low, it can increase after six months. Credit cards may also have monthly fees. Be sure to check with the financial institution from which you are obtaining a credit card to get all the details.

So why should you get a credit card?
Credit cards are quite helpful if used responsibly. If you do not currently have cash on you, or if the card offers incentives (reward points or airline miles for certain purchases) then it can be particularly useful. It is also important to build a credit history to prove that you are able to reliably make payments so that when it comes time to take out a large loan, you have a strong credit history. Once your credit history improves with continual payments, your credit limit will increase, allowing you to purchase more on credit.

Can you use your credit card as an ATM card?
Technically, yes. But be wary – you can use your credit card at an ATM, or receive “cash back,” but the interest charges for this service are often quite high. It is better to use a card with standard ATM functionality instead.

Should you open up a credit card for free stuff or discounts on merchandise?
Again, you can, but you need to be careful. Too many credit cards on a credit history can look bad. Additionally, you can easily forget to close a credit card, in which case it still remains on your credit history as available credit. You should probably only have one or two credit cards as a college student – you should call the credit card company and close any cards that you simply opened for free merchandise or that you no longer use. After all, credit cards are liabilities.

Falling into the trap of buying now and paying later has caused financial distress for many college students. If you open a credit card, keep track of your purchases and the due date of payments.