Be Thankful You Know the Pros and Cons of Credit
The fact you understand the value of owning and using a credit card responsibly puts you light years ahead of most students your age. You see the big picture at a time when most are just focused on the here and now. After all, knowledge as they say is power and knowing what it takes to build good credit, recognizing the difference between APR and APY, and being familiar with the term “two cycle average” puts you on a completely different stratosphere than most.
Still, it’s good to review these three important aspects of credit while educating those who are new to the world of personal finance. As you are aware the sooner you realize that you are the one who holds the key to that new car and big dream house the sooner you can get started building a credit foundation worthy of turning those dreams into reality.
1. How to build good credit
Knowing what makes up your credit rating is very important. There are five key markers that go into your FICO score calculation with a credit card serving as a key ingredient in four out of the five key categories.
- 35% Payment history
- 30% Outstanding debt
- 15% Length of your credit history
- 10% Recent inquires on your credit report
- 10% Types of credit in use
2. The difference between APR and APY
APR is your annual percentage rate while APY is your annual percentage yield. APR is the measure used to calculate how much interest will be accrued on your principle balance annually without taking compound interest into account. APY on the other hand is the same interest rate measure, however, it also accounts for the compound interest making it a better indicator of how much you will actually pay in interest.
3. Two-Cycle Average Daily Balance
This is the credit card industries dirty little secret. How the two-cycle daily balance works is simple: instead of computing your average daily balance for the current billing cycle, it computes the average daily balance for the current and previous billing cycle. You want to find a credit card company like Citi that does not take advantage of students by putting in place a two-cycle average daily balance billing cycle. What this two-cycle system means for you is that you pay more money in interest each month.
Let’s take an example. Say you have a starting balance of $1,000 on a credit card with a 15% APR. If you do nothing all month your finance charge will be computed as such:
(APR * days in billing cycle * ADB) / days in year = interest
(.15 * 30 * 1000) / 365 = $12.74 interest
So far, so good. But let’s say that you had a starting balance of $1,500 the previous month, and a starting balance of $1,000 this month. Your two-cycle average daily balance would be $1,250. If your credit card uses two cycle average daily balance, you will now pay:
(APR * days in billing cycle * TCADB) / days in year = interest
(.15 * 30 * 1250) / 365 = $15.41 interest
Establishing positive credit is obvioulsy important but getting the best card to use as your conduit is equally important. That’s why the Citi mtvU Platinum card and Citi Forward card continue to top our list of best cards for students. From rewarding students for having a good GPA to lowering your APR when you make a purchase, stay under your credit line and pay on time 3 billing periods in a row they are in a class of their own. It’s fun to dream big, but it’s even more fun to live that dream.
The best college cards for students: Citi mtvU & Citi Forward card
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