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Financial Education for Everyone

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October 16, 2006

College students have many sound reasons for getting a credit card: It’s a good way to start building a solid credit history, safer than carrying large amounts of cash and can be a lifesaver in an emergency. But inexperienced credit card users who don’t fully understand how they work, or the need for restraint and responsible spending, sometimes dig themselves into a deep hole.

If you’re just starting to build your credit history, or have a child who is, here are a few tips and cautions regarding credit card use:

Read the fine print. College students are often deluged with credit card offers. Don’t just apply for one because it has a free gift, and be alert to cards that offer low teaser interest rates. Often those rates rise dramatically after a few months. Instead, look for a card with low or no annual fees and that provides a lengthy grace period before finance charges commence (three to four weeks, ideally).You can comparison shop for the best card online at www.bankrate.com/creditcards.

Ask about late payment and over-the-limit fees. Under federal law these are spelled out in the application process, but make sure you fully understand what each one means. Look for a card that offers a leniency period with no additional charges, in case your payment gets delayed.

Pay off the full balance owed each month, whenever possible. Interest payments add up over time. For example, if you paid only the minimum amount due each month (assuming 4 percent) on a $1,000 balance, it could take over seven years and cost more than $500 in additional interest charges for a card with an 18 percent annual rate — and that’s only if you don’t make any new purchases. Practical Money Skills for Life, a free personal financial management site sponsored by Visa Inc., features an interactive calculator that helps you estimate the true cost of credit card purchases over time by entering different annual percentage-rate and monthly payment scenarios ().

If you can’t afford a purchase today, chances are you won't be able to afford it in a month when the bill arrives. Also, understand the full costs of using your credit card for cash advances, which can carry much higher interest rates and start accumulating finance changes immediately. This can lead to a downward spiral of debt that’s difficult to overcome.

Explore other alternatives. If you want the flexibility of carrying a credit card without the risks of incurring unmanageable debt, look into other options such as debit cards (where money is drawn from your checking account), secured credit cards (where you add cash to the account to be charged against), and prepaid cards like the Buxx Card, where parents fund the account and manage it online or by phone.

Before you start missing payments, contact your credit card issuer. They may be willing to work out a repayment schedule that won’t damage your credit rating, since that could make it difficult to rent an apartment or buy a car or house, later on. Also, many employers and insurance companies now run credit checks on candidates.

Students have enough to worry about with mid-terms and piles of laundry — getting an ‘F’ in credit cards shouldn’t be one of them.

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This article is intended to provide general information and should not be considered health, legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.

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