Having a credit card is not a good choice for every college student. There are advantages and disadvantages to having a credit card while in school.
If used responsibly, credit cards can have many advantages for college students including:
Beginning to establish a good credit report. Making small purchases and paying them off every month will be reflected on your credit report. These positive records will be beneficial when you want to rent an apartment, buy a car, or apply for certain jobs after college.
Learning fiscal responsibility. Living on a limited income is not easy but learning to control your spending is a habit that will carry for the remainder of your life.
A resource for emergencies. An emergency is not a new pair of shoes, a $70 pair of jeans, or video games. When emergencies such as car repairs or additional textbooks appear, a credit card can be an option for students. When using a credit card for emergencies it is important to have a repayment plan and to stick to it!
If NOT used responsibly, credit cards can have many disadvantages for college students including:
Not learning fiscal responsibility. Student who don’t have a solid understanding about credit cards often run up a large amount of debt that is difficult, if not impossible, for a college student to repay in a timely manner. (The average senior college student graduates with over $4000 in credit card debt.)
Building a credit history. If a student does not use a credit card responsibly (paying the card on time, paying the at least the minimum payment, carrying a large balance), these negative marks will appear on a credit report. Ruining your credit report while in college will make it difficult to be approved for a car loan, rent an apartment, and possibly obtain employment after college. If students do not feel they are ready for a credit card, it is much easier to establish credit after college than to fix it after mistakes have been made.
A resource for luxuries. Students often mistake wants for needs, especially when a credit card is available to use. Credit cards make it easy for students to live beyond their means.
If you are unsure if a credit card is a good option for you, talk to your parents or another adult who is financially responsible.
Key Credit Card Terms and Definitions
Annual Fee- a yearly fee charged by some credit card issuers for processing and maintaining your credit card account.
Annual Percentage Rate (APR)- the yearly interest rate you pay on your balance. Interest rates will vary based on your credit worthiness and the lender.
Cash Advance APR- Card issuers almost always charge a higher interest rate for a cash advance then they do for normal purchases.
Credit Card Limit- the maximum amount that can be borrowed on a credit card without penalty.
Credit Cards with Rewards- a credit card that offers you the opportunity to earn different types of rewards based on your usage and purchases.
Introductory APR- the initial interest rate on some credit card. This interest rate can be as low as 0% and can last for 6 or more months.
Penalty APR- a higher interest rate which usually starts when a payment is late, or a payment is returned. Usually, the borrower is required to make six consecutive payments on time before the interest rate can be returned to the original rate before the penalty was assessed.
Penalty Fees- a fee charged to your account for a variety of reasons including late payment, missed payment, and going over the credit limit.
Maintenance Fees- a monthly fee charged by some credit card issuers for processing and maintaining your credit card account.
Variable APR- The interest rate changes as the prime rate changes, causing the APR to either increase or decrease.
Credit Card Laws
The Credit Card Accountability Responsibility and Disclosure Act of 2009 or Credit CARD Act of 2009 is a federal statute passed by the United States Congress on May 22, 2009. It is comprehensive credit card reform legislation that aims "...to establish fair and transparent practices relating to the extension of credit under an open end consumer credit plan, and for other purposes."
The law includes several provisions aimed at limiting how credit card companies can charge consumers. Some of the provisions include:
Cardholders deserve protections against arbitrary interest rate increases.
- Requires card companies must give cardholders 45 days notice of any interest rate increases.
- Gives cardholders the right to cancel their card and pay off their existing balance at the existing interest rate and repayment schedule if an interest rate increase is imposed.
Cardholders should be protected from due date gimmicks.
- Gives cardholders time to pay their bills by requiring card companies to mail billing statements 21 calendar days before the due date.
- Requires the due date to fall on the same day each month.
Cardholders deserve the right to set limits on their credit.
- Requires card companies to offer consumers the option of having a fixed credit limit that cannot be exceeded.
- Prevents card companies from charging over-the-limit fees on a cardholder with a fixed credit limit.
Minimum payment explanation
- Requires creditors to print on their statements the payment it would take the debtor to pay off the debt in three years, how much the debtor would pay in interest combined and the difference if the debtor was to pay only the minimum payment.
Limits credit cards to teens
- A credit card cannot be issued to someone under age 21, unless they have a co-signer (who is 21 or over), or can provide proof of a means to repay.
College bank curtailment
- Requires banks to provide a reason for participating on college campuses and at university-themed events.
- Outlaws banks giving gifts or any promotional items (such as coupons for free pizza) to entice students to take on debt by signing with their credit cards.