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By Ellen Cannon, ©
2007, Bankrate,
www.bankrate.com
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,
the credit card issuers have been a part of every freshman's experience. A
study by MasterCard revealed that nearly three-quarters of cardholders still
had the same credit card 15 years after they got it in college. So signing
up students is integral to their business model.
The downside for students is that they often don't pay off the card while
they're in school, and they 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, director of the Economic Opportunity
Program 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 currently $29. 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. To put it 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.
Comparison shop
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?
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