Even if you can prove that you have the means to repay credit card debt, it is important for you to thoroughly understand how credit cards work and how they can both help and hurt you. Several frequently asked questions about credit cards are answered in the box later in this chapter. Simply put, a credit card allows you to buy something now and pay for it later. Each month, you will receive a statement listing all the purchases you made using your credit card during the previous thirty days. The statement will request a payment toward your balance and will set a payment due date. Your payment options will vary: You can pay your entire balance, pay a specified amount of the balance, or pay only a minimum payment, which may be as low as $10.

But beware: If you make only a minimum payment, the remaining balance on your card will be charged a finance fee, or interest charge, causing your balance to increase before your next bill arrives, even if you don’t make any more purchases. Paying the minimum payment is almost never a good strategy and can add years to your repayment time. In fact, assuming an 18 percent interest rate, if you continually pay only $10 per month toward a $500 credit card balance, it will take you more than seven years to pay it off, and you’ll pay an extra $431 in interest, almost doubling the amount you originally charged.

Avoid making late payments. Paying your bill even one day late can result in a finance charge of $30 or more; it can also raise the interest rate not only on that card, but also on any other credit accounts you have. If you decide to use a credit card to build credit, you might want to set up online, automatic payments to avoid incurring expensive late fees. Remember that the payment due date is the date that the credit card lender should receive your payment, not the date that you should send it.

If you decide to apply for a credit card while you’re in college, remember that it should be used to build credit and for emergencies. Credit cards should not be used to fund a lifestyle that you cannot otherwise afford, or to buy things that you want but don’t need (see the “Living on a Budget” section in this chapter). On the other hand, if you use your credit card just once a month and pay the balance as soon as the bill arrives, you will be on your way to a strong credit score in just a few years.