Credit Card Tips for College Students
by Professor Angelo DeCandia
Quick finance quiz … true or false? Credit cards are like money. Well they sure feel like money, especially when you can’t resist that stylish jacket or the more expensive entrée at the fancier restaurant. And these days they’re accepted everywhere, just like money.
But they’re not money, they’re loans. And loans have to be repaid … with money. And therein lies the difference. When you swipe your credit card you should be confident that you can pay the bill … shortly … like in a month. This is especially true for college students who often work part time or maybe even not at all. Credit cards can be advantageous, but proper use is essential if you want to make the most of them. Here are a few tips.
Establishing good credit – Credit cards offer convenience, emergency access to funds and they allow for online purchases. But the most important aspect, especially if you’re a college student, is that they allow you to build good credit. The value of this may not be immediately apparent, but down the road a strong credit rating allows you to access bigger loans for longer periods of time for some of life’s essentials. Obviously we’re talking car loans, mortgages and maybe even a business line of credit, if you have that entrepreneurial spirit.
Not all cards are the same – The terms offered you by the issuer vary from one bank to the other. In fact, students particularly should be wary of cards marketed with accompanying gifts such as T-shirts and coffee mugs. Often these cards are offered by smaller banks/institutions who may maintain more aggressive or unscrupulous tactics. That $10 dollar shirt may end up costing you hundreds or more dollars down the road.
Familiarize yourself with key credit card terms – You should know what is meant by the APR (the interest rate you are being charged) and the difference between annual fees vs. penalty fees. An annual fee is what you’re being charged for the right to have the card. In the competitive credit card environment found in the U.S. you should not apply for such a card. Shop around and you’ll easily find “no annual fee cards”. Otherwise you’re paying for the “right to spend,” which is somewhat akin to those flea markets which charge you just to enter. Also keep in mind that annual fees count as your first purchase, even if you never use the card! There are many cases of someone who has applied for a card, forgot about it, and soon found themselves delinquent even though they never made a single purchase. Penalty fees, on the other hand, are usually assessed for late payments or payments less than the minimum. They can be quite stiff (often around $25 - $35) and make any credit card a bad deal. Also keep in mind that failure to pay the minimum payment may also cause the original APR to be bumped up. Even on new purchases.
Be aware of how rewards programs actually work – If you were enticed by the card’s rewards program, be sure to understand how points are redeemed. Some cards automatically credit you 1-2%, thereby reducing your balance. With others, however, you have to redeem them online or by phone. And if you don’t get around to it, those points may expire. Also be aware that rewards may be valid for only certain types of purchases (gas, food, vacation) so if that’s not where you spend your money … well, then, there are no rewards.
If you can’t afford it, don’t buy it – You’ve probably heard that you should not carry balances from one month to another. Besides the additional interest you’ll by paying (that $1000 spontaneous vacation may end up costing you $2000), be aware that excessive purchases, those that bring you close to your credit limit, will result in a lower credit score. Credit raters prefer that you use around one third of your credit limit and they will penalize you if it is higher over a prolonged period of time. In fact, check your credit score every few months. Let’s face it, building a good credit score is one of the primary reasons for getting a card in the first place.
Avoid cash advances – Sure it feels good to use your credit card like an ATM card, but it will cost you. Banks may change 3-5% for that advance and it comes off the top. A $100 cash advance may net you only $95 … and you may have to pay interest on that, depending on when you pay it back. Before applying for a credit card you should first open a bank account. That is the most effective way of paying bills, building your savings and accessing cash when you need it.
So why bother – All these caveats may make you feel that credit cards are not worth the trouble, but they are … especially in today’s world where convenience, flexibility and a good credit score are essential for many of life’s activities. You just want to be sure that you avoid the obvious mistakes. Here are some statistics that will help to keep you focused on the best way to handle a credit card account:
- Half of all college-age cardholders got their first card at 18 years old
- One out of four has more than one card
- Four out of five don’t pay the full balance each month
- The average balance is over $2000
If you have a card, or if you plan to apply, consider these stats as a guide to how you will manage your account. Hopefully, you will limit the number of cards you have (not to mention the applicable credit limit) and pay off the balance each month. Your reward will be felt both now and later as you utilize the card for no one’s advantage other than your own.
Angelo DeCandia is professor of business at Touro College’s New York School of Career and Applied Studies (NYSCAS)