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Low Interest for Big Buys, Rewards for Total Payoffs
So, you’ve just turned 18 and you’re about to head off to college. If you’re anything like most 18-year-olds, you’ve probably started receiving credit card offers in the mail. Lots of credit card offers. The sheer number of cards out there and the array of options they offer can seem overwhelming. Yet, by keeping a few simple things in mind, it’s generally pretty easy to figure out which card is right for you. (And they’re usually not at the credit card table in the cafeteria.)
Those new to the world of credit are lucky in one way: If you’ve never had a credit card before, you haven’t had any chance to run up credit card debt. As long as you are disciplined enough to stay out of debt, a cash back or rewards credit card is a perfect choice for you.
Credit card rewards come in a number of forms such as cash back (sometimes as much as 2 percent), airline miles, points (which can be used to buy merchandise), free gasoline and more. If you are a seasoned credit card user, having excellent credit is the best way to get good credit card rewards. However, credit card companies love to attract college students, so students can typically get excellent credit card rewards, even without a credit history.
Make sure you don’t tap into your emergency funds. Emergency funds are for emergencies, like a sudden illness, loss of job, or car trouble. A big-ticket purchase is not considered an emergency, so eave your emergency fund account untouched.
DePaul Financial Fitness
The one drawback to rewards credit cards? They usually have a high interest rate. Of course, if you don’t have credit card debt and you make sure to pay your bill in full (meaning the entire balance, not the minimum monthly payment) and on time each month, you’ll never pay a penny in interest. People who are careful about this can really benefit from cash back or rewards credit cards. (A cash back reward amounts to a 2 percent discount on everything you buy with your card; reward points are a great way to get free airline tickets.)
If you find yourself needing to carry a balance on your credit card from month to month, forget about rewards cards — their higher interest rates negate any benefits you might receive from the rewards. Getting a 2 percent cash back reward doesn’t make sense if you’re paying 18 percent interest on your credit card debt. Instead, choose a low interest credit card. Low interest cards rarely offer rewards, but they generally guarantee an extremely low interest rate on your debt (as long as you pay the monthly minimum on time), which is invaluable if you are carrying debt on your cards. Paying 6 percent interest instead of 25 percent interest as you’re trying to pay off debt makes a big difference. Some cards even offer introductory rates as low as 0 percent for a year, which can be helpful if you need to make a big purchase that you plan to be able to pay off within a year’s time. Just be careful to read the fine print, as these cards can revert to extremely high interest rates at the end of their introductory period.
Rewards cards are great, but they’re not for everyone. Take a hard look at your finances and how you plan to use the card, then run the numbers to see whether reaping cash back rewards or enjoying a low interest rate makes more sense in your situation.
