When you graduate from college, chances are you’ll have two things: a diploma, and a huge pile of debt. The average nowadays is about $19,000 per student, and that’s a large increase over five years ago.
Much of that comes from financial aid, of course, but a large part is from regular ol’ credit cards, used by young people out on their own for the first time and perhaps not very savvy when it comes to financial responsibility.
Credit card loan centers love college students. That’s why they actively promote their products on university campuses all the time. You see the booths during the first week of school, offering little prizes and other incentives to get people to apply for their cards. They know college students can be counted on to spend a lot of money.
Unfortunately, that money isn’t free. A credit card operates more or less like a short-term money loan. When you use it to buy something, you’re essentially borrowing money from the lender, and you have to pay it back later -- with interest.
Sometimes students get their credit cards mixed up with debit cards. The cards look identical to one another and are generally accepted at the same locations. But the way they work is entirely different. Debit cards take money directly out of your bank account and given to the place where you’ve bought something. It’s money you already have, in other words. There’s no borrowing involved. Credit cards are something else entirely.
The Pluses and Minuses of Credit Cards
A credit card can be a wonderful tool, offering convenience and security. You don’t have to carry cash around with you, which can be dangerous. If you lose your cash, you’re out of luck. If you lose your credit card, you just cancel it and no one can commit credit card fraud against you. A credit card lets you buy things anywhere in the world, and even online or on the phone.
But there are other things to consider. Credit cards can be costly and difficult to manage, particularly for people who are just starting to establish good credit history. Paying your bill after the due date means penalties, and going over the spending limit means more penalties. Many students rack these up fairly quickly. It’s imperative to understand that if you use a credit card to buy things you can’t actually afford, you’re going to have to pay them off eventually, and your debt may become so large that you can’t handle it. This will ruin your credit score fast.
You might wonder, “How do I establish credit history?” A credit card can be very helpful for that. Your credit report and score are vital in your financial life, because if your credit score is good, you’ll get lower interest rates and better offers on credit cards. In general, lenders go by your credit score in determining whether to give you any credit. If you have bad credit, credit cards may be harder to come by.
Many elements are included in your credit report, and your credit score can be affected by any of them. Whether you pay your bills on time, how much credit you have, how “maxed out” you are, etc. To establish good credit history, you must be responsible in the way you use your card.
Credit Card Fees
There are several different fees and costs pertaining to credit cards. First and foremost is the basic interest rate, or APR (annual percentage rate). That’s what they charge you based on how much you’ve spent. If you pay off your card in full each month within the grace period (usually 25 days), you incur no fees. If you carry a balance, though, whatever is left has interest applied to it. If your APR is 16%, for example, then over the course of a year, you’d be charged 16% of your balance. For your monthly statements, they divide by the number of days in that statement period (30). Your interest rate can change, too, any time the lender wants.
Some lenders make you pay an annual fee, too, though most student credit cards don’t (because they want to lure you in). There can also be transaction fees for taking cash advances, as well as penalties for going over your credit limit or for making late payments. Those things can damage your credit score, too.
Credit Card Basic Tips
Don’t be afraid of credit cards while you’re in college; just be careful and use them wisely. Here are some general tips to remember:
- Spend only as much as you can afford to pay back in a short amount of time.
- Try not to “impulse buy” with your card.
- Don’t carry all your cards around with you; just keep one on hand.
- Pay off your balance as soon as possible -- in full each month, if you can manage it.
For more information about responsible credit card use, visit the Federal Trade Commission's Website at www.ftc.gov.
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