Credit cards are not evil, but they are dangerous if not handled properly. When you get your first credit card, it might be exciting to see a credit limit of $2000 (a common figure for a student account). Your spending power may have increased a hundredfold from what you've ever had in your wallet before, and as a result, the temptation will be greater than ever to spend that extra few dollars on a coffee here or a trinket there. But don't make the mistake of assuming that banks are loaning you this money from the goodness of their hearts.

Like any profit-oriented enterprise, they are focused on earning money and one of the biggest ways they do this is through compounding interest that will keep you indebted to them for potentially your whole life. This isn't to scare you away from them altogether, but understanding the danger must precede understanding their utility. At their worst, they are a gateway to debt and financial stress, but at their best, they are good tools and an essential method to buildingy our credit score (the earlier you start, the better), and they provide access to discounts and reward perks.

Treat Your Credit Card Like a Debit Card

A good rule of thumb, especially if this is your first credit card, is to spend only what you already have in your checking account and pay off your balance as soon as you make the purchase. If you're considering making a major purchase, review the current balance in your checking account and the money you are guaranteed to make over the next few weeks. If your balance is below the purchase cost but you know your next paycheck will cover it, wait until you have your paycheck so you can pay off your purchase immediately. You never know what other expenses will pop up in the meantime, whether car problems or some kind of emergency travel. Holding off on big-ticket items can keep you safe from late fees and interest that can sneak up on you if you don't pay on time or in full, and the rewards on your card (whether cash back, miles, or other perks) will accumulate over time

Interest, Minimum Payments, and Late Fees

Credit cards have a variable interest rate that depends on your financial history and credit score. A student card can have a rate anywhere between 15%-30% interest. Let's say your card's APR (Annual Percentage Rate) is 25%. If you're carrying a balance of $1000 by the end of your payment period, you will have an additional $20.83 to pay off for the following month (Interest = Balance x APR/12 months). It may sound like a little, but interest tends to accumulate, and by the time you pay off your $1000, you may have also paid an extra couple hundred or even a thousand dollars in interest, depending on how long it takes you to pay off your card in full.

One of the biggest mistakes contributing to the above is believing that if you make the minimum payment, usually $25, you're safe from fees and interest. The minimum payment keeps you in good standing with the lender and protects your credit score somewhat, but it does not prevent you from accumulating interest. Furthermore, carrying a high balance on multiple credit cards can hurt your credit score. Rather than entangling yourself in the mess that is interest, purchase what you know you can afford.

Building Your Credit Score

Your credit score, in brief, is a value between 300 and 850 given to you based on your financial history, with higher being optimal. Your credit score will determine whether you can secure loans for major purchases in the future (e.g., cars, houses, etc.). The three major credit bureaus—Equifax, Experian, and TransUnion—look at your payment history, amount owed, length of credit history, new credit, and credit mix. If you open a new credit card account, you will see an initial hit on your score; however, if you are responsible for paying off your card in full at the end of each payment period and hold a balance for the shortest time possible, your score will rise consistently. You will be as a responsible borrower and have access to a higher line of credit. This is incredibly useful if you are trying to make big purchases in personal or professional assets down the line. You may not know what endeavor you want to invest in after college or in 20 years, but building a good credit score now will facilitate your ability to secure future loans when you have more direction.

Card Rewards and Perks

Another perk of using a credit card over cash and debit are the rewards you earn when you spend. First, note that these are incentives for you to spend, meaning the purpose is that you purchase more than you can afford and wind up owing more in interest than you earn in rewards. These rewards depend on which card you go with. Most student cards will offer some percentage cashback on purchases, typically between 1% and 5%.

There will be offers of spending a certain amount within the first three months to earn money back, but only take advantage of these if you already have the cash to do so. If you spend $200 to make $50 but can't afford it, not only are you out $150, but you will have to begin paying interest on that $150. Other cards may have perks when it comes to discounts on airline travel or shopping with certain vendors. It may be tempting to want to "earn" more of these rewards, but the best thing you can do is ignore them and allow them to grow, and after a certain amount of months or years cash in on a rainy day or treat yourself for making good financial decisions.

Credit cards can be used to your detriment, but if you are a good financial steward, they are an excellent tool for building your financial foundation. It may not seem like it in the short run, but down the line you'll be happy you spent frugally and paid off your balance in full, especially when you have access to those higher lines of credit or simply have more cash to spend or invest elsewhere that isn't going toward paying off interest from when you were in college.