Going to college means managing your own money—and credit card companies know it. Students are bombarded with applications for credit cards. Before you send away for plastic, ask yourself: Do you really need a credit card?
The Pros
A credit card can cover a few expenses while you wait for cash from your financial aid plan, part-time job or parents.
If your car breaks down while you're traveling to campus, a credit card can be a lifesaver. Booking travel arrangements, like airfare home for the holidays, also becomes easier with credit.
Moreover, the credit card "loan" you get may be interest-free for nearly a month, since most banks allow cardholders a grace period to pay the balance.
A credit card also serves as a form of identification, even if you don't use it for charging things. And if you always pay the balance on time you establish a good credit record, which is critical for making future large purchases.
The Cons
But let's look at the downside: A credit card can sometimes make shopping a little too easy. Large balances can build up quickly. You may suddenly find it takes all your extra cash just to make the minimum payments.
Credit cards can be a very expensive means of borrowing. If you put $500 worth of books on a credit card charging 18 percent interest, made monthly payments of $20 and charged nothing else to that card, it would take two years and seven months to pay off that debt. In the end, $500 in books would cost you $619.50. Online debt calculators can show you the numbers for your own circumstances.
Tips for Good Credit
So as you sort through the applications that cram your college mailbox, here are a few tips:
- Carry only one card. This will keep you from "maxing out" several cards at high interest rates.
- Read the fine print. Look for cards with no annual fee. Some cards charge fees for services you don't need.
- Beware of cash advances. Virtually every credit card charges a cash advance transaction fee—usually $5 or two percent. Your repayments will probably be figured at a higher rate of interest as well.
- Check out annual percentage rates. They can vary from single digits to more than 20 percent (especially for cash advances). Some lenders charge a fixed rate; others follow the prime lending rate. Study the applications or run an online search to make sure you're getting the best deal.
- Look for a generous "grace period." That refers to the amount of time a lender allows before charging you interest on the balance due.
- Get a card with a low credit limit. A card with a limit of only $500 to $1,000 will help you control your spending.
To keep your credit clear, set limits on how much you charge and pay the balance on time. By setting spending limits, you can enjoy the benefits of credit while steering clear of debt.
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