The idea of a credit card seems too good to be true to many young adults. To the financially uneducated, student credit cards may even seem like free money and a way to provide instant gratification. On the other hand, those who are armed with financial knowledge know that credit cards can become a horrible financial trap if used improperly. It is extremely important for students to learn about proper credit card use early to avoid bad decisions and financial ruin. Here is some basic information about credit cards and how students can be wise in their use.
Know What You Want
Before you even get into the market for a student credit card, think about what features you want in a card. All credit cards aren't the same and it's important to determine what will work best for you. Understand all the terms and conditions in the agreement your will sign. It is a binding contract and you will be held to the terms. Here are some questions that you should ask yourself before you open an account.
- Are there any annual fees?
- What is the APR/interest rate?
- What credit limit is suitable for me?
- How much is the monthly minimum payment?
- When is the payment due date and does that work for me?
- What is the fee for late payments?
- Is there a grace period on item purchases?
- What is the penalty for missed or late payments?
Take your time when you answer all the questions on your list to ensure you conduct your search as best you can. Prioritize issues which are most important to you and how each issue may impact your financial security on a monthly basis.
Don't Sign on Impulse
Financial institutions are aware that many students will be eager to open a line of credit. And many will begin spending excessively almost immediately. Due to the fact that many students haven't established a deep or lengthy credit history, interest rates on student cards are generally high. Marketing tools are used to lure students by offering incentives to sign on. Don’t ever sign a contract if there are words or terms which you do not understand. The basic decision the card company makes is to balance the potential “risk” vs. “reward”. Credit is the ability of someone to obtain goods or services before payment, based on trust that payment will be made in the future.
Remember, just because you are a student doesn't mean that you don't have options. Take your time and do your research to identify the card which has what you. Weed through the bells and whistles that are offered up front and seek out the real facts that lie beneath the surface.
The Real Cost of Purchasing on Credit
Even though you may see the facts on paper, you may not have an understanding of what a credit card really may cost you. A credit card with a $1,000 dollar limit may not seem very intimidating, but can wreak havoc with a young adult’s financial well being for many years. Making minimum monthly payments for a given period of time is a “sucker’s bet.” A typical minimum monthly payment is 3% to 4% of the account balance, while the interest rate for a young adult’s card may be 20% or higher. So, month after month you are paying a small portion of your total balance while the credit card company is charging you a significantly higher amount…and you fall farther and farther behind while your total balance balloons out of control. The best way to optimize your credit card is to make small purchases that you can pay back at the end of each month. This will help you to establish revolving credit that will positively be reflected on your credit report.
With identity theft on the rise, it's important to take care of your credit card security by avoiding common mistakes. Check your credit card statements on a regular basis to spot any suspicious activity. Don't let people borrow your credit card. Keep your card in a safe place, like a purse or wallet verses keeping it loose in your pocket. Properly discard (shred) receipts of purchases you make with your card. Once you suspect that your card has been lost or stolen, report it immediately.