It’s the first day of your college life. Found your dorm room? Check. Found the dining hall? Check. Found the right credit card?
That could be the scenario at any college campus. For the past two decades, credit card issuers have been a part of every freshman’s experience as they vie for new customers they hope will carry their cards through their college years — and for decades beyond.
However, the new Credit Card Accountability, Responsibility and Disclosure Act may rain on this campus credit parade. Under the law, which largely takes effect in February 2010, card applicants under age 21 will be required to find a co-signer, pass a financial literacy course or verify income sufficient to cover any debts they charge up.
- Credit card pitfalls
- The Schumer Box
- Comparison shop
- Aim to be a deadbeat
For students that do qualify for cards, the downside is that may not pay off the card while they’re in school. Those that don’t will end up carrying not only student loan debt but also credit card debt when they graduate. And once they’re out of school, the expenses only mount.
“In my mind, the real potential for problems comes in the first two or three years starting out,” says Tamara Draut, vice president of policy and programs at Demos and author of “Strapped: Why America’s 20- and 30-Somethings Can’t Get Ahead.” “There’s a serious mismatch between earnings and cost. The credit card will be a lifeline. If you can’t ask parents for help and your car breaks down, that will go on the card. Those circumstances will add up. If you add clothing and dinners out, you’ll be in over your head. Reality alone is probably going to result in some debt.”
Credit card pitfalls
That’s the dilemma: You won’t be earning much money, you’ll have lots of expenses and you will likely have to put some things on a credit card just to survive. So how can you manage your credit card to minimize the damage?
“Late payment is the most common pitfall, and it’s one of the few areas where you can work with the credit card company,” says Draut. She recommends calling the credit card company to set the payment due date. You can arrange it for the time of month when you’re more likely to have money to pay the bill. “But paying late leads to trouble of all kinds,” Draut warns.
Every credit card company charges a late payment fee, and the average late fee is $24 for fixed- rate cards and $29 for variable-rate cards, according to an April 2009 survey by Bankrate. A late payment will also show up on your credit report, which might then trigger the interest rate increase “at any time for any reason,” which is in the fine print of most credit cards. That’s known as “universal default,” and although some credit card companies, such as Citi, are abandoning the practice, most still do it. If you’re late paying on any type of bill reported to credit bureaus, the card issuers may raise your credit card interest rate.
The Schumer Box
Every credit card shopper should become familiar with the Schumer Box, which every credit card offer must have. It’s written in legalese and barely understandable — and it’s usually found at the very bottom of the credit card Web site under “terms and conditions” — but there are many sources that explain what the terms and conditions mean.
For example, the section on variable rates contains different rates for purchases, balance transfers and cash advances. If you see “Default APR,” it means the credit card issuer practices universal default.
The “grace period” is the time between the purchase of an item and when interest on that purchase begins to accrue. The grace period on many terms and conditions is listed as 20 or 21 days, but it rarely explains that there is NO grace period if you carry a balance. Plain and simply, if you carry a balance, you begin paying interest on everything you buy at the purchase APR from the moment you buy that item until the balance is paid in full.
And then there are the fees: for late payment, for being over your credit limit, for cash advances, for balance transfers, for international transactions. The one fee that has disappeared on most cards is the annual fee. There is no need to pay a fee for the privilege of using a credit card.
Draut encourages people to comparison shop for cards, just as they would for anything they purchase. “Don’t be over-wowed by teaser rates,” she says. “Look at the real rate six months from now. All of the cards contain the same tricks and traps. There is a lot of competition for new cardholders, but as soon as you start carrying debt on that card, all of the offers are the same.”
To find the best credit card rates, use Bankrate.com’s rate comparison tool. It allows you to search for cards by low interest rate, no annual fee, secured, airline miles, rewards and student cards. Be aware that student credit cards carry higher interest rates, so if you qualify for a standard card, take it.
Another key to managing debt is to pay off the high interest loans, like credit cards, before lower-interest loans, like student loans. But be sure you keep up-to-date with all payments. Even if you can’t pay the balance in full, pay every month and pay on time.
While it may be a cliche, it is true: You must read the fine print before you sign up for a credit card and every month when you receive your statement. Credit card issuers often include changes to the terms and conditions in the monthly billing statements, so be sure that you read all of the “junk” that comes with the bill. It may save you money.
Aim to be a deadbeat
Ultimately, when it comes to credit cards, everyone should strive to be a “deadbeat.” Huh? Within the credit card industry, people who pay off their balance in full every month are known as “deadbeats” or “freeloaders,” because the credit card companies don’t make any interest or fees off these cardholders. They just use the credit card companies’ money, take the reward points, and pay off the bill. Who’d have thought when you graduated from college that your goal would be to become a credit card deadbeat?