Credit Card Smarts
Take Charge of the Cards
For many students, problems with credit cards in college can lead to long-lasting and punishing cycles of debt. Learning about responsible credit use now can save your child from unnecessary debt after graduation. Here are some credit card facts and strategies to help your child manage credit wisely.
Credit Cards and College Students
Credit cards are an indisputable fact of college life and there are many good reasons to have one. Credit cards give protection for purchases, enable online purchasing, and provide a cushion in case of emergencies.
If your child doesn't already have a card, she'll have plenty of opportunities to apply for one once she hits campus. Many credit card companies set up booths and tables at the beginning of the semester, offering sign-up incentives such as T-shirts or frisbees. But before your child signs on the dotted line, make sure she understands the following facts:
Credit Cards Are Not Free Money
In fact, they're really high-interest loans in disguise. Here's a breakdown of some typical credit card fees:
- Finance charge: This is an interest charge (can be as high as 20 percent) on the unpaid portion of the bill each month.
- Annual fee: Some companies charge yearly membership fees of anywhere from $20 to $100.
- Cash advance fee: Cash advances usually come with higher interest rates and steep fees.
- Late payment fee: Paying late can also result in hiked interest rates.
Carrying a Balance Can Be Costly
Your child should know that not paying off the entire amount in her account each month can lead to big finance charges. Take the story of Jane Student:
Jane's average unpaid credit card bill over a year is $500, and her finance charge is 20 percent. She pays a $20 annual fee plus a $25 late fee (she was up late studying and forgot to mail in her check). Jane ends up owing $145 to her credit card company, and she still hasn't paid for any of her purchases! Over 75 percent of college students carried at least one credit card in 2004.
Your Child's Credit Report Matters
The college years are an important time to build the good credit history your child will need after graduation. She'll need to provide a credit report to apply for an apartment or finance a large purchase, such as a car. Employers often review a credit report when they hire and evaluate employees for promotion, reassignment, or retention. Problems with credit cards, such as late or missed payments, stay in a credit report for seven years.
Be Credit Smart
When your child signs up for a credit card, she will be responsible for paying the bills. Review these rules of credit management with your child and she will be on the way to a financially healthy life:
- Read all application materials carefully—especially the fine print. What happens after the "teaser rate" expires? What happens to the interest rate in the event of a late or missed payment? What's the interest rate for a cash advance?
- Consider using a debit card instead of a credit card.
- Use credit only if the debt can be repaid quickly.
- Avoid impulse shopping on credit cards.
- Save credit cards for a money emergency.
- Pay bills promptly to keep finance and other charges to a minimum.
Additional Credit Card Advice
The Federal Trade Commission provides free information to consumers on dozens of topics related to credit and credit cards, ranging from "Choosing and Using Credit Cards" to "Avoiding Credit and Charge Card Fraud."
Adapted from Credit Card Smarts, a College Board publication.
