Is it better to pay your monthly credit card balance in full, or just the minimum?

There are pros and cons to both choices, as each can affect your overall finances and credit score.

Advantages of paying the entire balance at once include not paying interest fees, not maxing out on your credit card’s limit and the decrease of your credit utilization ratio. The credit utilization ratio is how much you owe compared to your credit limit. The lower the ratio, the better your credit score.

Unfortunately, paying off your entire balance means not having money for other purchases. If you are low on cash or have any major expenses coming up, paying your entire balance might not be the best idea.

What are the advantages of paying only the minimum credit card balance? It allows you to focus on paying your current finances and bills. If you’re short on cash, you only have to pay a small amount of the balance.

When you don’t pay off your total credit card bill, interest costs as high as 25% or more (depending on your credit card’s policy) will be added to your balance. This will likely take more time to repay depending on the minimum amount and the total balance.

As noted, there are multiple advantages and disadvantages towards paying only the minimum or the entirety of a credit card balance.  In the end, it is your job to decide which option is more ideal.

Written by Solomon Lowenstein, Financial Wellness for College Students Peer Educator, University of Illinois Extension.

Reviewed by Kathy Sweedler, Consumer Economics Educator, University of Illinois Extension.

Why do credit card companies offer reward programs?

As counterintuitive as it may sound, offering 5% cash back on goods users purchase actually increases a credit card company’s profit margins. The reasoning behind this lies within how credit card companies generate money. (Sometimes a bank or credit union issues the credit card). First, by offering an incentive to use credit cards as a form of payment over cash or checks, it increases the probability that the financial institution will be able to collect interest on any remaining balance left unpaid.

Second, by offering enticing reward options, financial institutions can depend on users to pay more often with a credit card; this leads to more interchange fees. Interchange fees are processed and transferred to the issuer as a form of revenue when a customer uses his or her credit card. By implementing an attractive rewards program, it increases spending and thus interchange fees.

Another reason why financial institutions offer rewards is to increase their market size and attract customers in new market segments that might not otherwise be inclined to use credit cards. With a multitude of different payment options available, institutions need to offer attractive options to differentiate themselves from their competitors. Also, if a good rewards program is in place, it decreases the number of users who switch to different companies and increases the chances existing users remain loyal customers. Loyal customers mean more credit card transactions being processed, and more credit card transactions mean higher interchange fee revenue.

Credit card reward programs may sound attractive to consumers; however, they are not always beneficial. Consumers need to understand the credit card interest rate, be cautious of  how much they spend, and realize their purchasing power if deciding to participate in the reward program.

Written by: Cuihua Lin, Financial Wellness Peer Educator.

Reviewed by: Kathy Sweedler, Consumer Economics Educator, University of Illinois Extension.

What is a good tool to help manage my debt?

According to a 2012 Sallie Mae report, “How America Pays”, 35% of students borrowed education loans to pay for college and, although credit card ownership has decreased recently, 35% of undergraduates have a credit card.

Credit is an important financial tool that students need to learn how to manage wisely. Learn more about how credit card debt can affect you now, as well as in the future by watching the recorded webinar, “Staying on Good Terms: Credit & Debt“.

Credit Management Tool: Use powerpay.org to help you manage your credit, pay down debt and plan your spending. This website was created by Utah State University Extension and WebAIM.org.

To learn even more about how to manage your finances while in college, including what to look for in a financial institution, you can watch another recorded webinar, Cash at College: Spending, Saving & Student Loans.

credit

Credit Cards vs. Debit Cards: What are the pros and cons of a credit card and debit card? What are the differences between them?

A credit card is a small plastic card issued by a bank, credit union, or other financial company which allows you to purchase goods or services on credit. The financial company usually establishes a credit limit that has the potential to increase or decrease depending on your spending habits and if you make payments on time. On a positive side, credit cards have a few advantages. In general, a credit card can be looked at as a 30-day, interest-free loan, as long as your monthly bills are paid off in full. Your credit card will allow you to begin to establish a credit history.

On the other hand, credit cards usually have high interest rates that will go into effect if you don’t pay a bill on time or don’t pay a bill at all. The interest amount accumulates over time, depending on how long it takes you to pay off the debt. Credit cards also are very vulnerable to fraud. It is important to monitor your purchase history, usually through a monthly paper or electronic statement. Monitoring helps you notice fraudulent activity. Lastly, if payments aren’t submitted on time, your credit history will be negatively affected, hurting your chances for future loans and other financial options to be issued to you.

A debit card is also a small plastic card that allows the holder to purchase goods and services, but it is usually issued by a bank or credit union. These cards are usually linked to a savings or checking account, where you will deposit funds for usage on the card.

Debit cards have several advantages that may be appealing to you! When you use a debit card, you are only allowed to spend the amount of cash that is available in your checking or savings account. (If have overdraft protection and you spend more, there may be immediate fees.) With this in mind, there is usually no need to carry cash as this is an equivalent. There are no interest rates ever associated with debit cards, due to the fact that you are spending your own money as opposed to taking a loan out with credit cards. Debit cards also have no effect on your credit history as there is no credit being used. Taking this into account, anyone who has a checking or savings account is able to sign up for a debit card, making it a viable option to consumers.

On the other hand, debit cards come with possible overdraft fees, which are put into effect if you spend more than what is in your checking or savings account associated with your debit card. If you choose a debit card, you are also required to remember a PIN number to make any transactions with the card. This PIN number must be kept confidential at all times!

Surely, several differences exist between credit and debit cards. If you have a credit card, monthly bills can be accessed electronically, or you can choose to have them mailed to you. On the other hand, debit cards have no monthly statements, which means you must keep track of your own expenses via your checking or savings account. For credit cards, there is a liability limit of $50. More often than not, you are not held liable for fraudulent activity. Furthermore, there is a lot less fraud protection with debit cards. There is a liability limit of up to $50 if you report in within two days of noticing the fraud. But your liability increases to more — or even everything in your account — depending on how quickly the fraudulent activity is reported.

 

Written by Joey Gangichiodo, Financial Wellness Peer Educator, December 2014. Reviewed by Kathy Sweedler, Consumer Economics Educator, University of Illinois Extension.

What happens to the interest on my federal loans while I’m in school?

All federal student loans have a variable or fixed interest rate that is set by Congress. The interest rate will vary depending on the type of loan you borrow and when the loan disburses. In most cases, if you have borrowed a loan since 2007, your loan will have a fixed interest rate. This means the interest rate will remain the same for the life of the loan or until it is completely repaid.

The amount of interest that accrues (accumulates) on your loan from month to month is determined by a simple daily interest formula. This formula consists of multiplying your loan balance by the number of days since the last payment times the interest rate factor. The interest rate factor is determined by dividing your loan’s interest rate by the number of days in the year. (Federal Student Aid)

Simple daily interest formula:

Outstanding principal balance
X number of days since last payment
X interest rate factor
= interest amount

Interest will accrue while you are enrolled in school. However, if you have a Federal Direct Subsidized Loan, the government will pay the interest that accrues while you are in school as long as you are enrolled at least half-time.

If you borrow a Federal Direct Unsubsidized Loan or Federal Direct Grad PLUS Loan you will be responsible for paying the interest that accrues while you are enrolled in school. Students enrolled half-time or more do have the right to receive an in-school deferment from their loan servicer. Students are still responsible for repaying the interest that accrues, but the payments are not due during the deferment period. Interest that accrues during a student’s deferment will capitalize (be added to principal amount borrowed). Capitalization occurs at the time you enter repayment and results in a higher amount to be repaid.

Written by Josh Keen, Office of Student Financial Aid