Wednesday, September 19, 2007
Signing Up For Their First Credit Card
SAN FRANCISCO, CA — As college students across the country begin the new school year, Consumers Union published an online guide for those signing up for credit cards for the first time. Financial institutions market credit cards aggressively on campus and many students rack up debt that can damage their credit records long after they graduate.
“Having a credit card can be a useful tool for young adults working to establish a good credit record,” said Norma Garcia, Senior Staff Attorney for Consumers Union, the nonprofit publisher of Consumer Reports. “But it’s easy to fall into deep debt if credit cards aren’t used wisely.”
An estimated 76 percent of undergraduates carry at least one credit card, according to a study published by Nellie Mae in 2005. Fifty-six percent of all undergraduates surveyed by Nellie Mae reported obtaining their first credit card at the age of 18. The average outstanding balance on undergraduate credit cards was $2,169. Of those students who use credit cards, 44 percent pay more than the minimum payment, but generally carry forward a balance; while 11 percent make less than the minimum payment each month.
Students who are considering signing up for a credit card should think about how they intend to use their card. If purchases can be managed with cash, check, or a debit card, a credit card may not be necessary. Students should never finance their college education or living expenses using a credit card. On the other hand, credit cards are useful for emergencies, purchasing essentials online, and establishing a solid credit history. Consumers Union’s guide offers a number of tips for students to keep in mind:
Not all credit cards are equal
1. Look for a card with a low Annual Percentage Rate (APR). The higher the APR the more the credit will cost you if you don’t pay off your balance every month. Watch out for cards that have a “low” introductory rate that goes up at some future time.
2. Look for a card with a low or no annual fee. This is the fee that the credit card company will charge you every year just for issuing you the card. You are obligated to pay the fee even if you don’t use the card. A card with no annual fee and a low interest rate is ideal.
3. Learn about the credit card’s default interest rate. This is the interest rate you’ll be charged as a penalty if you make a late payment or pay less than the minimum payment required. Your interest rate could double or even triple. This higher interest rate will apply to your existing balance and future purchases you make with the card.
4. Understand the credit card company’s “change of terms” policy. Many credit card companies reserve the right to change the terms of your credit card contract at any time for any reason.
5. Be sure to pay your other bills on time. Some credit card companies will raise your interest rate even if you always pay your credit card bill on time and in full. That’s because they take into account your bill paying history with other creditors.
Use your credit card wisely
1. Pay off your balance every month and make your payments on time. If you can’t do that, then pay off as much as you can afford and always more than the minimum payment required. If you pay just the minimum payment each month, you’ll be paying for many years to come. For example, a $1,000 balance with an 18 percent APR will take you seven years and an additional $1,731 in interest to pay back what you owe.
2. Pay attention to your balance and do not exceed your credit limit. Sometimes the interest charged on a balance or fees you are charged for paying late can put you over your credit limit and trigger additional fees.
3. Don’t take cash advances. The interest rate on cash advances is generally higher than the interest rate charged on purchases made with the card. When you make future payments, the card issuer will apply your payment to the lower interest rate first, allowing the higher interest rate debt you owe on the cash advance to mount.
4. Use online email alerts to stay informed. If you manage your credit card online, you can set up email alerts to tell you when a payment is due, or when you are close to your limit.
5. Carry only one credit card. If you must have a credit card, one is all you need to build a good credit history of on-time payments. Having only one card will also help you avoid confusion when it comes time to pay your bill.
If you get into credit card trouble, get help
Don’t hesitate to get help if you fall into unmanageable credit card debt. To contact a local credit counseling agency in your area, see: http://www.nfcc.org
“You can make your credit card work for you by choosing a card with no annual fee and by paying off your balance each month,” said Garcia. “This will help you build a positive credit record and open doors for things like renting an apartment or getting a low-cost loan for a car.”
For a copy of Consumers Union’s credit card guide for students guide, see
http://www.consumersunion.org/pdf/CollegeCCTips.pdf
For information on the best and worst credit cards based on the Consumer Reports reader survey, see www.consumerreports.org
Norma Garcia or Michael McCauley: 415-431-6747