Credit Card Tips for College-Bound Students
In the past year, a great deal of attention has been given to the marketing practices of credit card issuers on college campuses. These practices are aggressive and Congress has taken some action.
The US House Financial Services Committee on Financial Institutions and Consumer Credit recently held a hearing on credit card practices affecting college students. Congress may eventually require changes of the credit card industry and its marketing practices.
But it is the parent’s responsibility to teach their children about the correct use of credit cards and how to avoid credit card debt.
Credit card usage among college students is widespread. According to Nellie Mae, 56% of undergraduates get their first card at age 18 and 91% of final year students have a credit card. 56% of final year students carry four or more cards. The average outstanding balance on undergraduate credit cards was $2,169.
Parents need to teach their children how to responsibly use a credit card before they get to college. If you don’t, they will quickly learn some very hard lessons. College is probably the easiest time to get your first credit card and to build a credit score, but it must be done responsibly. The cards promoted with on-campus solicitations and freebies are probably not the best cards that you can get. Signing up for a credit card is not an impulse purchase–it takes research to find the best credit card.
The parents should have an open discussion with their college-bound student about credit cards. Make sure to:
–Talk them through your credit card bill. Explain the interest rate, minimum payment, grace period, and the finance charges. If you have had late fees or payment problems, use these as teaching examples.
–Determine how it will be paid off each month. Start with the practical question, “Can you afford to pay off the balance each month?” If the answer is no, then they don’t need a credit card. If money from the parents is going to pay off the balance, establish usage rules from the beginning.
–Help them compare the many card offers by looking through the terms and conditions to compare the actual rates and fees. LowCards.com compares and reviews cards for college students. It also has the Complete Credit Card Index that compares the rates
for over 1300 credit cards. Look for a card with a low APR, no annual fee and a grace period of 21 days.
Here are six tips on credit card usage for college students:
1. Pay off your balance each month. If you can’t pay for it with cash right now, then you can’t afford to pay for it with a credit card that will add interest payments to your purchase.
2. Use your card only for emergencies. Do not charge meals, clothes, gas or groceries to your credit card. If you carry a balance, you could pay more in interest than what you paid for the shoes or the meal.
During this time of freedom, it is easy for students to run up more debt than they can handle without thinking about the consequences. Issuers don’t overlook this as a beginner’s mistake. Not only do students have to pay the debt, but these mistakes can cause early damage to your credit score.
3. Pay attention to the date your payment is due. It is too easy to make a late payment. Do whatever you can to remind yourself about the payment–pay it online, sign up for payment alerts, write it on your calendar, etc. If you make a late payment, you will have to pay a high fee (typically $39) for each late payment and it can affect your credit score. More than one late payment during a year can increase your rate to the much higher default rate (approximately 29%).
4. Pay attention to the notices you receive about your credit card. Issuers can change your rate, credit card limit or other terms at any time. If you aren’t aware of the changes, this can be costly.
5. Pay attention to your credit limit. The credit limit is typically low for college students, and it may be easy to reach with a major purchase like a plane ticket. If you exceed your limit, the purchase will not be declined, but you will pay a fee (typically $39). Your issuer may also increase your rate to the default rate and this will lower your credit score.
6. Do not use your card for cash advances. The rate for cash advances is very high, between 20-25%. The fee for a cash advance is 3%, but not less than $10.