Welcome to College. Here's Your Credit Card.

By Beth Kobliner

If not today, it'll happen tomorrow. You'll open your campus mailbox and find a letter, or two, or three, inviting you to join the world of the truly free, the financially independent… the credit card owners.

But credit cards are a decidedly mixed bag: often handy but potentially ruinous. The vast majority of undergraduates have credit cards and an average debt of $2,748, around 50% higher than just three years ago. All this debt makes it harder to get going after graduation. For some, it will even mean bankruptcy.

So before you fill out that credit card application and sign on the dotted line, make sure you know the facts.

Buy Now, Pay Later?

Sounds great, right? You find something you want, but you don't have the cash — just charge it. You'll pay for it at the end of the month. But what if the bill comes and you can't pay it? Maybe you bought one more pair of shoes than you remember, or your paycheck didn't come in time, but that's okay, the credit card company will cover it. They'll just ask you to make a small minimum payment each month, usually two percent of the total balance, and let the rest slide 'til next month. The credit card companies count on you to do this, because that's how they make their money.

You're Buying Time — and It's Not Cheap.

When you make just the minimum payment, you're also paying a fee, called interest. It doesn't seem like much, maybe a few bucks more on that stack of books or pair of jeans. But what those few bucks mean is that your payment won't go as far. So your balance will take longer to pay off, and you'll end up paying more than you spent in the first place. This might not matter so much on a single purchase — a $100 splurge at the CD shop only costs you about $10 over the next year. The problem arises when you do it more often.

  

Do you really want to be paying for last night's pizza when you're forty?

A school year's worth of pizza and sodas — at, say, thirty bucks a week — adds up to around $1000. Put it on your card, and what will it take to pay it off? Make just the minimum payments, and you'll be paying for that pizza 20 years from now. That's some old pizza.



"But I really need the money!"

If you really need more money to get through your college years, look into taking out additional student loans. They'll be much friendlier to your budget in years to come than a big credit card balance.

Ask Yourself Twice: Can You Afford It?

Maybe you really like to buy things you can't pay for. It's hard to live on what you make and, besides, what's an extra $100 a month on the card? Well, by the end of your first year of monthly splurges and monthly minimum payments, you'd have a balance of around $1,150. Keep it up for three more years and your balance would be $4,150 — which would take 44 years of minimum payments and $12,000 in interest to pay off! Now that's one whopping graduation present.

 

"What If I Don't Pay?"
(or: How To Ruin Your Credit Rating.)

Late payments can haunt you even longer than big debts. Every month, credit card companies report what you owe and what you've paid (or haven't) to record-keeping companies who keep a file on you, called your credit report. This is one report card that really matters. Whenever you apply for a job, rent an apartment, buy a car or a house, or apply for graduate student loans, your credit report will be consulted, and if the news isn't good you won't get what you want. Most items on your credit report will stay there for seven years. What will you be doing in seven years? Will you want today's missed payments to get in the way?

 

How much will Spring Break really cost you?

Quick Credit Card Tips:

Interest Rates - do they matter?
(Hint: yes.)

Not all debt is bad. The difference is the interest rate.

The 5.99% interest rate on your student loan is your friend. This low rate will allow you to pay for your college education gradually without costing you unreasonably. A $10,000 student loan paid back over ten years will cost you $2,175 in interest.

The 18.5% interest rate on your credit card is your enemy. This high rate will keep you in debt for longer and cost you more than you ever thought possible. A $10,000 credit card balance paid off over ten years will cost you $8,429 in interest.

 
  • Budget your spending so you'll be able to pay your full balance every month.

  • Always pay more than the minimum. If you can't pay the full amount, paying just $10 more than the minimum each month will help you out a lot. Remember that pizza? You'd save $1400 and 14 years just by adding $10 to each month's check.

  • Consider a debit card. It works like a credit card, but the money comes right out of your bank account. No interest, no debt — and no out-of-control spending.

  • Find a low-rate card. Some cards have rates below 10%, but many are still charging 18% and more!
    Check www.Cardweb.com and www.Bankrate.com for deals.

  • Beware of cards with super-low "introductory" interest rates — they usually only last a few months. Read the fine print.
  • Stay away from cash advances. When you use your credit card for cash, like an ATM card, you're likely to pay more in interest, and you won't get the normal grace period
  

Note: All credit card examples in this pamphlet assume 18.5% interest.

Beth Kobliner is the author of Get a Financial Life: Personal Finance in Your Twenties and Thirties.
Read more at www.Kobliner.com.

You can download a printable version of this flyer: Page 1; Page 2.