Don't Break the Bank: A Student's Guide to Managing Money (20 page)

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Closing old accounts.
This is a common mistake. Many people think they should close old accounts they no longer use. In reality, this can hurt your credit score. (Remember, your score takes into account how long you’ve had credit, so keeping accounts you’ve had a long time can be a good thing.) To keep the account from seeming dormant, you should use it occasionally for a small purchase and then pay it off quickly.

Chapter 10

Charge It! (Paying with Plastic)

Having a credit card can help you learn to handle credit responsibly and can also help you establish a credit history. And of course a credit card can come in handy if you have an emergency when you’re short on cash. However, it’s very easy to get into trouble by buying stuff you don’t need and racking up big credit card bills you can’t afford to pay. So this really requires self-discipline and the ability to resist temptation when you see something you want to buy. (Even many adults have trouble keeping their plastic habit under control!)

Can You Get a Card?

It’s not as easy for a young person to get a credit card as it used to be. That’s a good thing! Credit card companies were notorious for swarming college campuses and bombarding kids with offers for credit cards, even when the students had no job and no way to pay the bill. A law passed in 2010 prevents anyone under 21 from getting a credit card unless he or she can prove there is enough income to pay the bill or get a co-signer.

Credit Card Pros and Cons

As with anything, there are advantages and disadvantages to using credit cards. Your informed use of credit cards begins with understanding these.

Advantages

Immediate Access:
Need a new set of tires? Credit can help with an expensive, unexpected emergency and give you the flexibility to pay it over time.

Security:
Lose cash, and it’s gone. Lose a credit card, and it can be canceled. Also, if you report a lost or stolen card promptly, you’re protected against its unauthorized use.

Recordkeeping:
Your credit card statement is an itemized list of your monthly expenditures, which can be helpful when it comes to budgeting.

Convenience:
Credit cards are accepted at more places than checks, and they’re generally faster to use.

Bill Consolidation:
Bills can be paid automatically via credit card, consolidating several payments into a single lump sum.

Rewards
: Using a credit card with a rewards program may earn you benefits like free travel.

Disadvantages

The main disadvantage to credit card usage is its cost to you in interest and fees. Wise use of credit means understanding those costs and acting accordingly. Keep track of your spending to ensure that you can repay your credit card bill in full when it comes due each month.

You can read more about this at
http://www.practicalmoneyskills.com/
.

Credit Card Terms

Here are some helpful terms when it comes to credit cards:

• Annual fee: This is the fee a credit card company will charge you just for having the card, whether you use it or not. Not all cards have an annual fee—and for those that do, the fee can vary widely.

• Annual percentage rate (APR): This is the yearly interest rate you will be charged for any balance you carry on the card.

• Balance: This is the amount you owe on the card.

• Grace period: This is a period of time during which you can pay your balance without any interest charges.

• Introductory rate: Card companies will often lure you in by offering a low rate for an initial period when you first get the card. The problem: People often forget when this period will end, and then they suddenly find themselves paying a much higher rate.

• Minimum payment: This is the lowest amount you can pay on your monthly bill for a credit card account to keep the account in good status. If you only pay the minimum every month, you will end up paying a lot of interest charges.

Tales from a Real Teen

“College students have too many credit cards! Fifty percent of college students have four credit cards or more (per Sallie Mae). As a college student, I propose that all students carry just one credit card.”

~
Scott Gamm, 19-year-old student at NYU’s Stern School of Business and founder of the personal finance Web site
helpsavemydollars.com

Interest Will Sneak Up on You

When you buy things on credit, you pay
interest
, which keeps building over time if you don’t pay off the full amount. If you’re not careful, you could end up paying for that new computer or car stereo for years, and it could cost you hundreds of dollars more than you thought. Consider these basic purchases charged at the average 18% interest, with only minimum payments made every month:

–Source: Dollar Sensei,
http://www.dollarsensei.com/TSAC/creditcards.htm

Let’s say you like to shop at H&M. You are out with friends at H&M and see a sweater you really like. Would you be happy if the clerk wanted to charge more than what’s listed on the price tab? More than likely, you would not. That’s what will end up happening when using a credit card and not paying off the balance—you will owe more for that clothing item because of interest. That’s why it’s important to pay off your credit card debt to avoid accruing interest and paying more.

~
Ornella Grosz, Author of
Moneylicious: A Financial Clue for Generation Y

Remember Your Credit Limit

Your credit card limit is the most you’re allowed to spend, not how much you should spend. When you reach the limit, you’ll be denied further charges, and it gets even harder to pay down. It also counts against your credit report when your balance is maxed out.

Uncover the Hidden Charges

The fine print on credit card applications can get pretty interesting. Often, what looks like a great deal brings with it lots of hidden costs and what the banks refer to as “transaction fees.” Here are some common extra charges that build up quickly:

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Late fees:
Make a late payment, and you’ll pay a late fee, which is sometimes equal to the minimum monthly payment.

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Annual fees:
This is a yearly charge just for having the credit card, generally around $25–$50.

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Over-limit fees:
This is a penalty charged for being over your credit limit.

Increased Interest

When you make multiple late payments—sometimes as few as two or three—the lender may increase your interest rate substantially.

Don’t Take Cash Advances

Getting cash from your credit card when things are tight may seem like a great deal, but usually those cash advances come with strings attached. It’s another way for the company to charge you a transaction fee, and usually you pay a higher interest rate on the advance than you do on regular purchases.

Stop New Offers by Opting Out

Remove your name from credit card mailing lists and opt out of new credit card offers by calling 888-5-OPT-OUT (888-567-8688) or visiting www.optoutprescreen.com. It’s free and easy.

Do’s and Don’ts of Credit Cards

• Do use it responsibly. It’s not a free pass to buy anything you want.

• Don’t forget your payment due date. The credit card company can tack on a hefty late charge even if you’re only one day late.

• Do shop around to find the card with the best terms and/or perks.

• Don’t go over your limit or you will get hit with an extra fee.

• Do contact the card company immediately if your card is ever lost or stolen.

Choosing a Credit Card

There are a ton of credit cards out there to choose from. You may already be getting bombarded by offers in the mail and online. Don’t make the mistake of thinking all credit cards are alike. There can be big differences, so you really need to shop around before you pick one.

• Consider your habits and credit personality. Are you the type to pay off bills immediately? Do you have a lot of self-control when it comes to shopping, or do you tend to make a lot of impulse purchases? If you don’t plan to carry a balance (you can pay off any charges within the grace period), then the interest rate may not matter so much to you. However, if you’ll be carrying a balance, you will want to pay attention to the interest rate as those charges will add up quickly.

• Look at the interest rate. Even if you don’t plan to make a lot of purchases or carry a balance, it’s still good to try to find the best interest rate you can, just in case. An emergency may crop up when you need to put an unplanned charge on your card.

• Check out rewards. Many cards offer rewards points or other bonuses. Often, you can earn these points for doing things you would do anyway, such as buying snacks, if you pay for them with your credit card. The important thing here is to pay for your charges right away. Otherwise, any rewards you may earn will be outweighed by the interest charges you’ll end up paying.

• Research any other fees. In addition to the interest rate, you may also end up paying other charges. The most common is the annual fee. Make sure to read the fine print in any credit card application to find out about these hidden fees.

Expert Advice

Pay off all credit cards in full every month (highest rate first). A $5,000 credit card bill paid off at $100 a month will take nine years and $5,100 in additional interest charges. If you’re paying 20% interest on credit card debt, action item number one is to pay it off before you do anything else. There’s no point investing your money at a 10–15% gain, when it could be used to avoid a 20% loss.

~       
Aaron Forth, VP and GM of Intuit Personal Finance Group

There’s no need to memorize your credit card number, but plenty of folks do know their credit card numbers by heart. Chances are they probably do a lot of online shopping! But what do the numbers on a credit card mean? Believe it or not, those numbers are not random. The 16 digits are there for a reason, and once you know what the different numbers mean, you can determine an awful lot about the credit card. You can learn to be a credit card sleuth.

Check out this info-graphic at TheMint.com to learn more about how to crack the credit card code:

http://www.mint.com/blog/trends/credit-card-code-01202011/
.

Secured Credit Cards

If you are just starting out and need to build credit (or have some credit issues and want to rebuild your credit), a secured credit card may be an option. This is a credit card, which is “secured” by a deposit you make into a connected account. Your credit limit is usually equal to the amount of your deposit. These are usually low-limit cards and may have a higher-than-average interest rate. But it can be a way for you to build credit, and often, once you use the card for a certain period of time, it switches to a regular credit card.