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Financial Literacy: Credit Cards

Find a penny, pick it up...and put it into your retirement fund! Financial Literacy focuses on making smart financial decisions and planning for the future.

First, how do credit card companies even make money?

It's a good idea to understand how credit card companies work before opening a card. Want to learn even more? Check out the Industry Profile for Credit Cards in the United States.

Charging Merchants: Ever wonder why some stores have minimum purchase amounts for credit cards? That's because credit card companies take about 2-3% of the purchase for themselves. For smaller purchases, this doesn't amount to much, but it adds up quickly. (So next time you're debating whether to pay with cash or credit at your favorite family-owned restaurant, lean toward cash, for the restaurant's sake!)

Interest and Fees: An unpaid balance on a credit card accrues interest, usually at high rates. Credit card companies also dish out fees for late payments, annual fees, and fees for spending more than your credit limit.

Selling You: Credit card companies also give your name out to other companies for commission, so that other companies can try to persuade you to open another card with them.

Sources: Money Under 30 (Note: Money Under 30 is a for-profit personal finance website for young adults that receives commission for any clicks you make on their website to banks, credit card companies, etc.)

Five Common Credit Card Mistakes that College Students Make

1. Getting too many credit cards: "If you’re just getting started with learning how to manage a credit card, your best bet is to pick a card that suits your needs and stick with that one card for a couple of years. This will give you practice with establishing good credit habits like managing spending, paying bills on time, and staying out of debt without the pressure of having to juggle multiple cards."

2. Not tracking spending: "Over time, this could lead to a pretty hefty debt that will be tough to pay off. So don’t fall into this trap; figure out a way (digital or analog) to keep track of how much you’re spending so that you don’t go overboard."

3. Forgetting about the bills: "Failing to pay your credit card bills on time could seriously damage your credit score, and moving into your adult life with less-than-stellar credit is going to make it difficult to get a home or car loan."

4. Adopting an "I'll pay for it later" attitude: "Recent college graduates have had a tough time landing jobs, so don’t assume you’ll immediately transition into a career that’s well-paying enough to tackle all your bills and a huge credit card debt. The best thing to do is spend responsibly with your card – only charge what you’ll be able to pay off within a month, no matter how much of a big shot you’re sure you’ll turn out to be."

5. Avoiding credit cards altogether: "Fifteen percent of your credit score is determined by the length of your credit history, so it’s crucial to start building that history right away. As soon as you’re able to qualify for a credit card, get one and use it responsibly."

Source: NerdWallet (Note that NerdWallet is a for-profit company that receives commission for any clicks you make on their website to banks, credit card companies, etc. However, they state that this does not affect their recommendations or advice.)

Credit Cards

Source: hrp_images now, Flickr, CC BY-SA

Should I Get Rid of My Cards?

If you're using them responsibly, no. Credit cards are a great way to establish a credit history. If you have multiple cards, it may make sense to get rid of the oldest cards and keep the newest one, since you haven't missed as many payments. But, getting rid of your oldest card will shorten your credit history and lowers the average age of your credit, too. Credit length makes up 15% of your credit score! Unless your oldest card is the source of your bad credit, getting rid of it might actually lower your credit score. The same idea applies to opening new lines of credit, as any new cards will lower the average age of your credit.

Source: "Money Mistakes You Can't Afford to Make"