Becoming a college student marks a new stage of independence. Part of this independence is managing your personal finances. Many college students choose to take advantage of credit card offers extended to them at this important time of life. While there are distinct advantages of having a credit card there are also many disadvantages and traps to be aware of before you sign up.
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Managing a credit card well can help you begin to pave the way for a good credit score. A good credit score means you will more easily be able to obtain finance in the future or rent an apartment and one day buy your own home.
However if you do not manage your credit card efficiently you are opening yourself up to potential financial struggle. Your credit score will suffer and it will have damaging effects on potential future purchases and financial opportunities. It is estimated that 76% of college students have at least one credit card. However of those students around 79% of them regularly have an outstanding balance on their credit card. This means they are subject to high interest charges and a range of credit card fees. This makes the price of having a credit card too high for many students with a low, or no income.
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These tips are designed to better prepare you for managing a credit card and to help you to choose the best college student credit card if you decide to get one.
1) Ask Yourself The Important Questions First
Question 1: Is this credit card really necessary? Just because a credit card is being offered to you, doesn’t mean you need it. Credit card companies target young people as they often show little self restraint when they are offered credit. Coupled with the fact they have little experience managing their own finances they make for good potential customers.
Question 2: Can I afford it? In order to be able to afford a credit card you need to have a source of regular income. Do not accept a credit card with the hope that your parents will cover your monthly bill unless this is an agreement you have made with them. Whatever you spend on the credit card should be able to be repaid in full by the end of the month. If you cannot repay what you spend in full then you probably can’t afford it.
Question 3: What is the purpose of this credit card? Many students choose to have a credit card simply to cover emergency costs. This is a good safety net to have although the same can be said for a savings account that you regularly contribute to. A credit card should not be obtained for purchasing luxury items you cannot afford to buy outright. This sort of attitude is guaranteed to get you into trouble.
Question 4: What is a reasonable credit limit? Your income should determine your credit limit. By sticking to a limit that you can comfortably repay at the end of the month you will avoid excess charges and high interest charges. Credit card companies often offer you a higher credit limit than you can realistically afford. Don’t be afraid to lower the limit as soon as you get the card. It will be relatively easy to increase it later if you find you are managing the current limit easily.
Question 4: Can’t I just make the minimum repayments? That is exactly what the credit card company wants you to believe. You can simply make the minimum repayments but expect to be penalized for it. By making only the minimum repayments you will incur high monthly interest charges. This interest adds up over time making it near impossible to completely repay your card. When you make only the minimum repayments it will take you many years to repay it, during which time you could be paying more in interest than you initially borrowed.
2) Beware Of The Traps
Credit card companies enlist a whole host of strategies to secure customers. They are proven methods which is why they continue to use them. You can avoid these ‘traps’ by knowing what they are in advance.
First of all watch out for credit cards that come with a ‘freebie’. The freebie is designed to entice you and make you believe you are getting something for free. In fact you will probably end up paying for the freebie through higher interest charges or high annual fees. If you really need the item that is being offered for free, go and buy it. Don’t get a credit card just so you can get it supposedly for ‘free’.
You may think there is no harm in getting a credit card now because you can simply cancel it if you change your mind. There are some credit card companies that will not allow you to cancel your credit card until it is repaid in full. This means that until the balance is cleared you will be subject to all their fees, even if you are not using the credit card. Make sure you ask about this and read the credit card agreement in detail before you sign up.
3) You Don’t Need More Than One Credit Card
You might get several offers of credit from various companies. If you must accept the offer of a credit card do some researching first and only accept one. The novelty of having more than one will quickly wear off as you get a pile of bills in the mail at the end of the month. One credit card with a modest limit should more than cover the requirements of any college student.
4) Shop Around
There are most certainly some credit card companies that offer better terms than others. It is your responsibility to shop around and find the best one. Here are a couple of important points to remember:
Find a card with a low interest rate. The higher the interest rate the more you will pay in interest charges each month. Ideally your credit card will have an interest free period although this may be hard to find. This means you have a set amount of days to repay the amount of a purchase before interest will be charged on the amount. If you can find a card with this option and you can manage repayments in full within the time frame you can make your credit card work for you.
Consider the additional fees that you could potentially be charged. Almost all credit cards will have an annual fee. You might think you have a great deal with a low interest rate but it may be compensated for with a high annual fee. A good credit card will offer both low interest rates and a minimal annual fee.
Default interest rates are what are charged when you fail to make a repayment or make late repayments. These interest rates can be incredibly high and many people forget to ask about them before they sign up. Knowing what you could be paying if you make a late payment might be the motivation you need to make sure you pay your bill on time.
Take time to read and actually understand the full terms and conditions of your credit card. If you are unsure about what they mean, ask before you sign up. It is important to know the complete list of potential fees and charges you could face. You should also know what is involved in canceling the credit card and increasing or decreasing the credit limit.
5) Use Your Card Carefully And With Caution
Ensure you are repaying more than the minimum amount due at the end of each month. Failure to do so will only see the amount you owe slowly increase even without subsequent spending.
Carefully read your monthly statement and look for any charges that you do not understand such as additional fees etc. Query these charges with the credit card company immediately. By overlooking potential errors you are paying for someone else’s mistake.
Avoid getting a cash advance on your credit card at all costs. Interest rates for cash advances are traditionally very high. You might only need $50 cash but you could end up repaying at least double that.
Managing your credit card online is a good way to keep tabs on your spending and additional charges as they occur. Some credit card companies also allow you to set up email alerts which are good to remind you when your repayments are due.
Don’t lend your credit card to other people. You might want to help someone out but in the end it is your finances and credit score that is potentially being put at risk. Other people will not see the urgency you will in making monthly repayments to avoid excess charges.
Be extra vigilant about security when using your credit card. Keep it in a safe place at all times and don’t let anyone know the card number or secure pin numbers you might have.
6) Don’t Let Problems Escalate
If you are struggling with repayments or having any trouble managing your credit card, get help immediately. Letting the problems fester will only make them worse. Talk to your credit card company about your options if you are struggling. If you need to you may need to speak with your parents about helping your out too. Alternatively you will be able to find free budget counseling services, sometimes on campus, to help you get back on track.
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