Learn how to get the right card, scope out the details and use it wisely. Doing so can give you a great financial start. But foolish choices can haunt you for years
For college students today, getting that first credit card has been as much a rite of passage as keggers and all-nighters were for their parents.
But thanks to the Credit CARD Act, that's all about to change.
Two out of three college students have at least one card, according to a recent U.S. Public Interest Research Group study. But for too many students, that first card has led to disaster, prompting the law's tight restrictions on how credit card companies deal with young adults.
The Credit Card Accountability, Responsibility and Disclosure Act forbids companies from issuing credit cards to anyone under 21 unless the young adult has an older co-signer or proof of sufficient income.
Those credit card company booths and giveaway programs that have been fixtures at colleges for years will be going away, too. The Credit CARD Act specifically bans such marketing at or near campus or at college-related events.
The restrictions will go into effect in February 2010, so for students who get their applications in before the deadline -- and those old enough to apply for their own cards once the restrictions are in place -- college can be a great place to start themselves on the right credit track before they leave campus for the real world.
Used properly, the right credit cards can help you build your credit history, allowing you to:
- Qualify for lower rates on auto loans and mortgages after you graduate.
- Reduce your insurance premiums, since many insurers use credit information to determine their prices.
- Get a decent apartment, since many landlords check credit scores.
Here's how to do it right.
Apply for the right card
Universities and alumni associations have been raking in big bucks steering you to certain credit card companies ($1 billion a year, according to BusinessWeek), which flood students with offers via e-mail, snail mail and campus kiosks.
But that doesn't mean those issuers will give you the best deal. A university-branded card may tout a low initial interest rate, for example, that quickly jumps to 19% or more after a few months.
Even worse are the so-called subprime credit card vendors that stick you with big upfront and annual fees that can eat up most of some cards' available credit. Do your own research. Check out the student cards offered by sites such as CardRatings.com and Bankrate.com or the best overall values identified here on MSN Money. Don't get sidetracked by rewards programs, low introductory rates or other trimmings, advised Curtis Arnold, the author of "How You Can Profit From Credit Cards" and founder of CardRatings.com.
You want a card that:
- Charges no application fee or other upfront fee.
- Has no annual fee.
- Comes with a decent interest rate; 14% to 17% is typical for a student card. (Avoid a card that offers a rate "as low as" a certain percentage, because you're likely to wind up with a much higher one.)
- Reports to all three credit bureaus.
That last point is important. If your card isn't reported to the bureaus, it's not building your credit.
How do you know? The major issuers that specialize in student cards, such as Citi, Capital One and Discover, report to all three. Before applying for a card from a credit union or small bank, though, ask in advance whether your account would be reported to Equifax, Experian and TransUnion.
Also: Apply for one card at a time, and let several months to a year pass before you apply for another. You need only one card to start building a credit history; a second card will continue to help, but if you apply for many more you're just increasing the chances you'll run into trouble.
Study the lit
Your card will come with a fat packet of information providing the details of your card, including benefits and fraud protection. Some of it is important (yes, there will be a quiz), such as:
- What are your interest rates and fees? We hope this information will be academic (more on that in a moment), but you still need to know. You'll typically have three rates: one for purchases, one for balance transfers (debt transferred from another card) and a third for cash advances. When you make payments, they'll go toward the lowest-rate balances first, so your higher-rate balances will continue to accrue fat interest charges. (The Credit CARD Act reverses this, so issuers will required to apply payments to the highest-rate balance first.) Also, check out the fees for paying late or charging more than your limit. They're ridiculous, so avoid them. (The law addresses over-limit fees, too, banning such practices unless a cardholder opts to allow them.)
- What's your credit limit? Speaking of ridiculous, your limit may be laughably low with your first card; $500 or less isn't uncommon. What's more, you don't want to charge anywhere close to that amount. The best way to build your credit is to charge no more than 30% of your limit, so no more than $150 in any given month on a $500 card. Remember, you're using this card to build your financial future, not finance your lifestyle.
- When does your statement period close? It's the amount you owe on that date that's reported to credit bureaus, and that should be paid off in full every month.
- When are the due date and time? Like the statement closing date, the due date may vary by a few days from month to month. You'll want to make sure your payment gets to the issuer a week or so before this date. Some issuers have a cutoff time, so that payments received after, say, 1 p.m. Central time on the due date are considered late.
- What's the card's toll-free number? Program this into your cell phone so you can easily check your balance, ask questions and get problems corrected.
Your card is not a toy
Misuse your plastic and you could pay the price for years. Some things in particular you'll want to avoid:
- Taking cash advances. Your card is not your bank account. Cash advances come with high interest rates that apply immediately (there's no interest-free grace period, as there is with purchases when you pay your balance in full every month). Find a cheaper source of cash.
- Paying late. You'll trigger a late fee ($30 to $40, typically) and possibly a higher interest rate. Worse, if you skip a payment entirely, you'll trash those credit scores you've been trying to build. A single skipped payment can knock 100 points off your scores, and the damage can linger for years.
- Getting anywhere close to your limit. The less you charge, the better, but your scores will really take a hit if you let your charges creep above 80% of your limit.
- Paying the minimum. This is such a bad idea it needs its own section. Read on.
Pay your balance in full -- always
Your first statement will show you how much you've charged by the statement closing date as well as something called a minimum payment, which is typically 2% to 3% of your total balance.
If you want to wreck your life, pay only the minimum due each month.
Seriously, carrying a balance is an awful, expensive habit, and it leads a lot of folks into financial hell. When you pay the minimum, you're setting yourself up for years of debt and total payments that pretty much double the cost of whatever you've purchased.
If you pay only a 2.5% minimum on a $2,000 balance at 15% interest, for example, you'll be paying off that debt for about 15 years at a total interest cost of $1,758. You don't have to be a finance major to know those numbers suck.So pay in full, even if it means eating ramen noodles the rest of the month. And if you don't have the cash to pay the bill, don't make the charges.
One easy way to make sure you can pay it off: Every time you charge something, move an equivalent amount of money from your checking to your savings account. Right before the bill is due, move the money back into checking to cover the payment.
Get online access and sign up for alerts
Because you shouldn't charge more than 30% of your limit or spend more than you can pay off, you need to keep track of your balance. Always. Fortunately, that's pretty easy.
Once you have online access, you can monitor your account and set up text or e-mail alerts that can:
- Give you a running balance.
- Alert you when payments are due.
- Provide a heads-up when you've charged more than a certain amount.
- Warn you of suspicious transactions.
Get in the habit of checking your balance before charging anything. It takes just a minute or so to call or sign on.
Set up automatic payments
College life is busy. It's easy to forget basic things, like showering, and anything more complicated than that can get lost in the shuffle.
Arrange with your credit card company to have your total balance debited from your checking account each month (or, at the very least, your minimum payment -- you can go online and make an additional payment each month to pay off the bill). Then make a note on your calendar a few days before each due date to remind you to make sure there's enough money in your account to cover the payment.
In other words, set yourself up for success. As with most other aspects of college life, a little research and planning can pay big dividends. You can graduate free of credit card debt but with high enough credit scores to ease your way to adult life. It's worth the effort.
