That first credit step can be a doozy, so do it right
Posted on October 1, 2007
Filed Under Advice, Students Credit Cards | Comments Off
So, your college student finally needs a credit card and, wisely, you want to make sure she gets a great deal and avoids falling into traps.
Alas, all too often, young adults stumble at the start. They succumb to the free Frisbee or T-shirt come-on and choose a card with high annual fees. Then they get nicked again and again with charges for running up large monthly balances. Before they’re home for Christmas break, their credit history is a wreck, and those freebies suddenly look terribly expensive.
Myrna Hernandez of Stockton, Calif.: “My husband and I share your philosophy on credit, and our son and daughter had checking accounts in college, but no credit cards. However, since they do appear to be a necessity of modern life, you might suggest to your readers that their children obtain a credit card during the last term of their senior year before graduating.”
Her point is that having a credit card can help establish a credit history that will open up doors when it comes to renting an apartment, purchasing essentials and dealing with emergencies.
If your son or daughter is edging toward applying for plastic, at least arm them with enough information so their prospects for success with credit are good.
Fortunately there are plenty of good teaching tools at your disposal, including a new online resource from Consumers Union, the nonprofit publisher of Consumer Reports magazine. This month, it unveiled a guide on its Web site to help those applying for a credit card for the first time ( www.consumersunion.org/finance/CollegeCCTips.htm).
Consider this primer from Consumers Union on how to apply for and use credit cards wisely:
• Shop for a card with a low annual percentage rate. The higher the APR, the more the credit will cost you for failing to pay off the balance every month. In addition, beware of cards that have a low introductory rate that goes up a few months later.
• Look for a card with no annual fee, or a low one. This is the fee the credit card company charges every year just for issuing a 3½- by 2-inch piece of plastic.
There’s nothing I hate more than paying for the privilege of using a credit card. The best deal? A card with no annual fee and a low interest rate.
• Check on the card’s default interest rate. You don’t hear much about this rate, but overlooking it can be costly. The default rate kicks in when you make a late payment or pay less than the minimum amount required. Your interest rate could double or even triple, according to Consumers Union, making it a quick way to turn a small balance into a big one.
• Understand the card issuer’s change-of-terms policy. Many financial institutions reserve the right to change the terms at any time and for any reason.
Danny Shah, a reader from Florida, amplified that point.
“Before issuing you a credit card, they (offer) you all the discounts, air mileage and low interest rates,” Shah wrote me in an e-mail. “A few months down the road, they send policy revisions calling out a different picture.”
• Pay your balance in full and on time. That’s the key. But if you can’t do this, at least pay off as much as you can afford and always pay more than the minimum payment required.
If you only pay just the minimum each month, you’ll be paying for many years. Consumers Union offered this example: If you carry a balance of $1,000 with an 18 percent APR, it will take seven years and an additional $1,731 in interest to pay it back. It’s that ugly.
Keep in mind that 79 percent of undergraduate college students don’t pay their balance in full each month, meaning they regularly pay interest on that remaining sum of money, according to a survey from student-loan company Nellie Mae.
• Carry a low credit limit. Don’t sign up for a credit card with a high credit limit of say, $5,000 to $10,000. That’s a quick way to overspend and get into trouble. Instead, start with a low limit of $500 that can be repaid more realistically on time.
• Follow the one-credit-card rule. Many young adults assume they need lots of credit cards to build a credit history. That notion is false.
My suggestion: Keep it simple. Your child needs only one card. Pay it on time and preferably in full.