Even as school starts up again around the country, students may already be falling behind in one critical area of knowledge: How to choose and use credit cards. Unfortunately, until financial education is taught in high schools across America, students have to enter the world of consumer credit on their own. We talked to a couple of credit experts to ask them what they would tell students if they were teaching Credit Cards 101.
1. Read the fine print. This is obviously good advice for anyone, but consumer advocates say it’s most important for young people who are inexperienced with financial products to read everything before signing on the dotted line. And don’t be afraid to shop around, says Amber Stubbs, managing editor of the card-review site CardRatings.com. “Shop around for a card that has low fees and as low rates as possible,” she advises. Just because a credit card application is addressed to you doesn’t mean it’s going to be the best card for you
2. Don’t count debt as income. The Credit CARD Act of 2009 banned a lot of the worst credit-card practices targeting students. Now, people under the age of 21 either need to have a co-signer or enough income to make payments. But a loophole in the law has led to some students being able to obtain credit by counting their student loans as income. The trouble is, it’s not income; it’s debt, and piling debt on top of debt isn’t going to make it easier to pay either of them off. “The combination can be devastating,” says Stubbs. Just don’t do it.
3. Don’t co-sign for a friend. The CARD Act’s requirement that people younger than 21 have a co-signer has reportedly led to some students seeking out older classmates to sign for them. Whichever end of the deal you’re on, this is a huge risk, because if your pal charges a week’s worth of fun on spring break and then flakes out, you’re going to be stuck paying off every tequila shot — with interest.
4. Pay attention to the APR. While you need to check out all the fees associated with a credit card, the most important by far is your purchase APR. Credit cards with rewards programs, for instance, often have higher APRs than “plain jane” cards. Likewise, some cards branded with popular logos can carry hefty interest rates — we found a Capital One card with an MTV tie-in that had a near-penalty rate of 24.9 percent as its standard purchase APR. While your goal should be to not revolve a balance from month to month, financial emergencies can happen to anyone. If your laptop has a meltdown or your car needs a new transmission, you’re going to care much less if your card says MTV on the front of it and more about whether you’re paying that bill off at 12 percent or 25 percent interest.
5. Only apply for credit you need. ”I wouldn’t advise going out and applying for another card anytime soon,” says Stubbs. “Too much too soon can also get you in trouble.” Not only does going on a credit card-applying spree leave you vulnerable to the temptation of all those credit limits, applying for multiple cards in a short period of time has a negative impact on your credit score. Even if you don’t think you need to worry about your credit score today, those inquiries — where a potential lender checks your credit to decide if they want to issue you credit and at what terms — stays on your credit report for two years, which could hurt your ability to get a car loan or rent an apartment down the road.
6. Pay in full every month. Students who go wild with partying learn pretty quickly that there’s a price to be paid the next day. A financial hangover may take a little longer to catch up with you but can be just as much of a headache. Again, while this is good advice for everybody, it’s especially pertinent for students. A full school schedule may make it difficult or impossible to increase your income enough to pay that debt down. What’s more, if you keep charging and only making minimum payments, it’s likely you’ll bump up against your credit limit before too long — a move that’s really rough on your credit score, especially since students don’t have a long history of positive credit activity to counteract it.
7. Watch out for rewards. Rewards aren’t a bad thing; in our piece coming soon about the best student credit cards, there are some that come with a points-based or cash back rewards program. But cards tied to rewards programs can have two drawbacks: They have higher interest rates than non-rewards cards, as we mentioned above, and the appeal of earning a “freebie” might lead you to spend more than you otherwise would to qualify. Reward cards are more likely than others to carry annual fees, which there’s no reason for you to be paying at this point in your life. “There’s really no reason a student would need a card that carries an annual fee,” says Doug Miller, senior analyst for banking and cards at market research firm Corporate Insight.
8. Be cautious with school-affiliated cards. Some colleges market logoed cards on campus, but many of these aren’t issued by the big banks that back most credit cards, and finding information about them online can be difficult, Miller warns. “Definitely take time to read over what the different attributes and features are aside from a free T-shirt,” he says.
9. Know when to ask for an increase. There’s a time and a place to ask for a credit increase. That time is not shortly after you get the card; you might not know at that point if you have the financial discipline to handle a higher limit, and you’ll probably get denied anyway. But after about a year, or if you graduate and land a full-time job that gives you a big bump in your income, it’s a good idea to call your card company and ask for a credit limit increase even if — especially if — you don’t plan to use it. Lenders like to see that you have credit available that you’re not using, and a higher limit will reflect well on your credit score as long as your charging habits remain the same.
Want extra credit? This webpage from the Financial Literacy & Education Commission is designed to introduce young adults to credit cards.