Chances are, if you’re a college student, you’ve been bombarded with amazing offers and deals from credit card companies. Should you have a credit card in college? If so, how should you choose which one? These are important decisions that should be made with a great deal of consideration, because they can impact your credit score for a long time.
Good credit vs. Bad credit.
Having a credit card is a common tool for building good credit, which can allow you to do things like rent an apartment, get a car loan, or even buy a house down the road. Bad credit creates a high hurdle on these same things.
How does credit go south? If you regularly carry a balance on your card instead of paying it off in full each month, you’re paying interest on that balance which increases the total amount you are paying to the credit card company. It’s easy for that to turn into debt. This is probably not news to the majority of you. Getting into credit card debt is a lot easier than getting out of it.
Should you get a card? Here are some questions to ask yourself.
- Do I need one? The pros: Credit cards can come in handy for emergencies and online purchases. You will establish good credit IF you pay your bill on time each month. The cons: If you think it might be a challenge to pay your bill each month on time, you might want to stick to using cash, check, or a debit card for now.
- Can I afford it? If you have to pay a big annual fee or are putting your hard-earned money into paying interest on your credit card balance, that’s a lot to spend for a card. If you can avoid those traps, a credit card may make sense for you.
- How will I pay this bill every month? And again, you’ll want to have a plan for paying down every penny — not just the minimum payment. Paying only the minimum means you will be paying down this card for a long time, even if you stop using it.
How to choose the right card? Here are some things to keep in mind.
- Never sign up for anything “on the spot.” Take the information and read it over in an unrushed way before signing up. Beware of freebies, hard sells, and any pressure tactics that try to get you to commit fast!
- “You can cancel any time.” This may not be as easy as the promise sounds. Consumer Reports says that “many consumers have reported difficulties canceling credit cards they no longer want. Either the customer service representatives were not helpful or they couldn’t cancel the card because they carry a balance they cannot afford to pay off. Many times, those balances were driven up by fees charged on their accounts for late payments, and interest rate hikes.”
- Don’t say yes to a high credit limit just because a credit card company is willing to give you one. Be aware of companies that automatically increase these limits. A high credit limit makes it easier to spend money you don’t have. Especially if you’re new to having a credit card, keep that limit low and manageable.
- Choose a card with a low Annual Percentage Rate (APR). This is the interest rate you’ll pay to borrow money with your credit card. Be aware that some cards give a low introductory rate but ratchet that up quickly. The higher the APR, the more interest you’re paying on each borrowed dollar.
- Choose a card with a low or no annual fee. The best deal is a card with no annual fee and a low APR. However, if you have no choice but to carry a balance on your card (really — no choice! We don’t recommend this!), you may opt for a card with a slightly higher annual fee but lower interest rate.
- Understand the card’s default interest rate. If you make a late payment or pay less than the minimum, what happens? Chances are the company will double, or possibly triple, your rate. That higher APR will be applied to future purchases as well as the balance you’re carrying. Again, this is why it’s so easy to get into credit card debt, so hard to get out of it.
- Read the card’s Change of Terms policy. Talk about fine print! Read this section of your contract closely and you may find that your credit card company has reserved the right to change the terms of your agreement at any time and for any reason. Broken record, but another reason why it makes sense to pay off the full amount monthly. It really cannot be oversaid! If you don’t like the new policy, you can stop using the card.
- Beware of “Universal Default.” What does this mean? It means that even if you pay your credit card bill on time and in full, the company has the right to raise your rate if you have fallen behind on other bills with other creditors. Be aware of this.
- Keep just one card. It makes it simpler.
- Don’t use cash advances. The interest rate is usually higher than on purchases made on a card.
- Keep track on your balance and do not exceed your credit limit, or you may get hit with additional fees.
We hope this is useful. This is a big decision, so it’s a good idea to run it by your parents or other advisors.
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