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FAQ on students and credit cards
Credit cards 101

Despite the dangers of debt, credit cards aren't all bad. The trick is understanding how plastic works so you can use it to your advantage and not get stung by exorbitant fees and interest rates. Here are answers to some of the more frequently asked questions on student credit cards.

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Click on question below to see answer

Q. Where can I get the best terms on a student card? Q. I'm over my head in credit card debt. What do I do?
Q. As a parent, don't I have a say in my child's use of credit cards? Q. What can I as a parent do?
Q. How long does it take to pay back the debt? Q. What happens when I fall behind on payments?
Q. How many college students have credit cards? Q. Why is it so easy for college students to get credit cards?
Q. Why do so many college students get into trouble with credit cards? Q. Should college students avoid credit cards altogether?
Q. How do you establish a good credit history as a college student without racking up a whole bunch of debt? Q. How do you get a good deal on a student credit card?
   

Where can I get the best terms on a student card?
Bankrate lists national and regional credit card issuers. Most student cards come with starting credit lines ranging from $500 to $1,000. In our latest survey, interest rates on student credit cards range from 10 percent to 19.8 percent. Those rates are OK -- not as good as adults with good credit, not as bad as people who have already mishandled credit. All of the ones at the low end of the scale are variable rate cards, so you can expect them to rise. We're in a very low rate environment now. top of page

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I'm over my head in credit card debt. What do I do?
Start by assessing the damage. Make a list of all creditors, noting balances, credit lines, interest rates and monthly payments.

Track expenses. How much money comes in and how much goes out each month? Where's it going and why? Are there places you can scale back spending and free up more money for paying down card debt.

Stop charging up those credit cards. Pay with cash or debit cards instead.

The best way to pay down the card balances is to zero in on one card at a time. Pay $25, $50, $100 or whatever you can spare on top of the minimum payment. Minimize interest costs by transferring balances to the card with the lowest interest rate.

From a dollars-and-cents standpoint, it makes the most sense to pay down the card with the highest interest rate first. Once that first balance is paid off, focus on the card with the next smallest balance and so on. Check out this step-by-step explanation of how to do that.

If you've been a good card customer and always paid your bills on time in the past, you may want to call your issuer and ask for a lower rate. Many times, card companies will, if pressed, cut a break for a student because they want to keep the young debtor for life. A student who slips up once on a card payment, for example, may be able get that late fee waived with one quick phone call. It's definitely worth a shot.

If you're way over your head in debt, talk to a credit counselor from a Consumer Credit Counseling Service. There are about 1,400 of them across the United States, and it's a common enough problem that there's an office near most large college campuses.top of page

As a parent, don't I have a say in my child's use of credit cards?
Only your power of persuasion.

Students arriving on campus are inundated with card offers. Card companies can, and will, issue one to almost any student 18 and older. The companies that have deals with the colleges have card tables set up on campus, offering free hats and T-shirts for students willing to sign an application. Credit card applications are stuffed into their bags when they buy books, or stacked near bulletin boards. top of page

What can I as a parent do?
Too many parents don't talk to their children about money. The best thing that parents can do is to talk to your children about wisely handling debt before they head off to campus. Agree to the rules and warn them of the pitfalls of improper use of credit.

Here's a start-them-slow solution: Parents may ask their card issuer to authorize an additional card for the student. There are also cards available to parents who can link a child's card to their accounts, or where they can keep refilling the teen's or student's accounts as they go along. It's a way to keep up with what's going on and limit spending but still provide the freedom and convenience of a card.

If your student is like most, and has a credit card, discuss the issue. When is its use allowed? Only in an emergency? Discuss what makes an emergency (Here's a hint: It isn't Friday night pizza.)top of page

How long does it take to pay back the debt?
Let's look at an example using the true cost of paying the minimum calculator from Bankrate.com.

Let's say you've got a $2,000 balance on a credit card with 16 percent APR and 2 percent minimum payment. If you only make the minimum payment it will take you 291 months, that's more than 24 years, to be rid of your debt. In that time, you will pay $3,329.14. top of page

What happens when I fall behind on payments?
A card issuer will jack up your interest rate and charge you hefty penalty fees. A negative mark will be placed on your credit report and stay there for seven years.

A bad credit rating can affect your ability to rent an apartment or buy a car or house. The mark stays on your credit record even if the bill is later paid in full, and insurance companies and employers may also check credit reports.

Some cash-strapped college students with big credit card bills end up cutting their course loads. The reason? They need to start working or work more hours each week to pay their card bills. Other students are forced to drop out of school until they can get their debt under control.

It's also important to note that studies show that 50 percent to 60 percent of college students with credit cards -- or their parents -- pay off the balance in full each month. So plenty of college students graduate without racking up credit card debt.top of page

How many college students have credit cards?
According to Nellie Mae, more than 83 percent of undergraduate students have at least one credit card.

Although freshmen have the lowest rate of card possession among undergraduates, more than 54 percent carry a credit card. The percentage of students with at least one card increases to 92 percent in sophomore year.

Ninety-six percent of graduate students carry an average of six credit cards.

The average student credit card balance is $2,347.

Graduating students have an average of $20,402 in combined education loan and credit card balances. Sixteen percent or $3,262 of that debt, for final-year undergraduate students, is from credit cards. Graduate students carry balances of more than twice that.top of page

Why is it so easy for college students to get credit cards?
Credit card issuers realize that parents can be counted on to bail out students who run up balances or fall behind in payments.

Credit card issuers want college students as customers because students tend to be loyal to their first credit cards, and they will keep on charging on those cards long after graduation.top of page

Why do so many college students get into trouble with credit cards?
Robert Manning, author of Credit Card Nation, reports that the four primary contributors are the extension of unaffordable credit lines, increasing education-related expenses, peer pressure to spend and financial naïveté.

But there are signs that the word is getting around on college campuses. The median debt level among card-carrying undergraduates -- where half the population has balances lower than this amount and half have balances higher -- has risen to $1,770, up from $1,236 in 2000. This is an indicator that more students are using their cards regularly and may not be paying off the balances each month.top of page

Should college students avoid credit cards altogether?
No. Despite the dangers of debt, credit cards aren't all bad. In fact, graduating from college without a credit card may not be a good idea.

It's easy to forget the upside of signing up for a credit card as a college student, namely establishing credit. Making the leap from college to the real world is going to be a whole lot tougher without a credit history.

Without a credit card, you can't rent a car or get a good car insurance policy. You could get turned down for an apartment when a potential landlord checks your credit history and finds nothing there. Or you could be asked to shell out an enormous deposit before moving in.

Once you graduate, getting a credit card will be more difficult. Let's say a pre-approved credit card offer does comes your way. There's a good chance you'll be turned down. The reason? The lack of a revolving credit account on your credit report.

Used well during college, credit cards can help a student establish a respectable credit history. Gerri Detweiler, author of The Ultimate Credit Handbook, puts it this way: "The best reference you'll find on a credit report is a major credit card paid on time, all the time."

Graduating with a couple of years of on-time credit card payments showing in your credit report saves you a lot of time and money after graduation. But you don't need a lot of cards to build credit. One or two low-limit cards is enough. Just stay within your credit limit and pay your bills on time every month. top of page

How do you establish a good credit history as a college student without racking up a whole bunch of debt?
Here are five basic steps for using credit cards to build a credit history:

1. Map out a spending plan.
The best way to manage your money over the course of a semester is to sit down and map out a budget. List sources of income, such as scholarships, loans, money from summer jobs and cash from your parents as well as expenses, such as tuition, books and groceries.

2. Go slowly.
Get one card with a low limit and use it responsibly before you even consider getting another. You don't need a whole bunch of cards to build credit. One or two low-limit cards is more than enough. What matters is that you pay your bills on time every single month. Your goal is establishing a solid payment history. Graduating with a couple of years on-time credit card payments should do the trick.

3. Use credit cards sparingly.
Once you get into the habit of reaching for a Visa, it can be hard to stop. Avoid using credit cards for small purchases, such as sodas and snacks. Who wants to pay interest on a bag of Doritos?

4. Set your own credit line.
Afraid you'll spend as long as there's room on the card? Call your credit card company and request your credit limit be lowered. Keep at it. Card companies will try boost up your credit lines so you spend more. Tell them "no" each time they try.

5. Avoid cash advances at all costs.
Taking out $200 cash advance on your credit card when you're in a money crunch is a really bad idea. You'll pay an upfront fee of 2 to 4 percent on the amount you withdraw and you'll be stuck paying a high interest rate, often in the high teens or higher. And because there's no grace period on a cash advance, the interest charges will begin to mount as soon as the money comes outs of the ATM. You can rack up all kinds of debt in a hurry with just one or two cash advances in a semester. Avoid them.

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How do you get a good deal on a student credit card?
Study the terms and costs of any offer before signing on. Here are some key questions to ask:

Does the card have an annual fee? If you're looking for a no-frills, low-rate card offer, there's no reason to pay an annual fee. Avoid cards that charge them.

What is the card's APR? The lower the interest rate, the less money you'll pay when you carry a balance. Does the card come with a super-low introductory rate? How long does the teaser rate last? Will you be able to pay off your card balance before the teaser rate expires?

How long is the card's grace period? Most cards offer grace periods to customers who pay off their balances each month. A grace period is the period after a purchase is made during which interest is not charged. If payment is made in full by the end of the grace period, no interest is charged. But if only a partial payment is made, interest kicks in at the end of the grace period.

Many issuers have whittled down the interest-free grace periods on credit cards from 25 days to 20. Some credit cards have no grace periods at all, which means the interest clock starts ticking after every purchase. Avoid them.

What are the card's penalty policies? While nobody plans on missing a credit card payment or going over the limit, it's important to realize what will happen if you do.

Penalty rates and fees are on the rise. Some card issuer's policies are quite severe. Be sure to check. Pay careful attention to what will happen if you pay late during a card's introductory period. Will that super-low teaser rate disappear after one little mistake?

Don't overlook credit cards available from credit unions on campus. These cards tend to have more consumer-friendly rates and fees.

Be sure to check out Bankrate.com latest survey of credit card offers for college students. top of page

Posted: Aug. 15, 2002


See Also
10 tips for handling credit wisely
Budget worksheet for college students
Hey freshman: Get ready for the credit card deluge
The day I arrived on campus

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