Understanding the types of debt that you may have accumuluated over the last few years can be a confusing prospect. Americans in general are living with more debt than a generation ago, which means that long term fiscal health of young people is declining. To help mitigate the effects of bad debt, new graduates may wish to reevaluate their credit cards. This section of our website helps seniors and recent graduates better understand credit cards.
The average senior graduates with about $3,000 in credit card debt, according to recent data from student loan provider Nellie Mae. Even before graduation, more than half of college students are shouldering revolving balances of more than $1,700.
"Credit cards are a wonderful device, but they exist to make money for somebody -- and that's not you," says Fred Brock, author of "Live Well on Less Than You Think: The New York Times Guide to Achieving Your Financial Freedom" and a journalism professor at Kansas State University. Modern life requires credit, he notes, "but boy, do you need to be careful. You're playing with fire."
- Consult your family - Chances are, they've had credit cards for years. They'll know a few things about how they work and how quickly those balances can creep up. Work out a budget so you know what you have to live on. What do you do in an emergency? If something happens and you need an airline ticket home, a visit to the dentist or a part for the car, is there a bank account you tap? Or is that when you use a credit card? And if so, who pays the bill?
- Don't get a card for the promotional prizes. Students think, "I won't use (the card), but I'll get it anyway," she says. It's a lot cheaper to put aside a couple of bucks and buy those sunglasses or alarm clock.
- Shop around. If applying for a credit card is part of your financial plan, use multiple offers to your advantage. You only need one card, so compare:
- What's the annual percentage rate, or APR? You should be offered a decent rate if you've never had problems with credit before. "Interest rates today are historically low," says Brock. And "anything more than 2 or 3 points above prime is, in my opinion, outrageous."
- How long will that APR last? "If anyone tells you they are giving you a permanent interest rate, walk away," says Brock. "There is no such thing."
- What's the penalty fee for a late payment, and what's considered late? Some companies mark you late if it arrives the day it's due but after a certain time of day.
- What's the penalty rate? You could get your rate hiked after just one late payment. So how high could it go? "I'm one who thinks you should be really leery of deals on credit cards," says Brock. "You don't want frequent flier miles or bonus deals." Instead, look for a card with fairly simple rules, a reputation for treating customers well, a low interest rate, and the amount of credit you need.
- Know the rules of your card. Most cards have some pretty intricate rules that they require users to follow. Violate one and you could end up paying penalty fees, having your rate raised and damaging your credit record, which would increase the costs if you ever need to borrow money. This means you have to read all that fine print that comes with the card.
From time to time, credit card companies will change the rules. They could raise the rate; switch what day your payment is due, etc. You'll get a notice in the mail. "They send out these little tissue-thin booklets with agate type," says Brock. "When those things come in the mail, it's almost always some bad news. Your job is to find the bad news."
- Have your own rules for using the card. The dumbest way to run up a bill? A long series of little things you don't even remember buying. "You should not be charging movie tickets, you should not be charging lunches on a credit card," says Brock. Decide ahead of time what the card is for and how you'll pay it off when you do use it.
- Protect your credit rating. There's another reason to be careful with your card. How you treat it can have a big impact on your quality of life. Now that you have a credit card, you'll have a credit report. This is a record of your personal information and how you're handling your finances. If you make any mistakes, they stay on your record for years.
There are three credit reporting agencies: Equifax, Experian and TransUnion. Card companies will usually report to one, two or all three. This is also where financial institutions will go for information when you apply for a loan. A bad rating means you either will be denied loans or will have to pay higher interest rates. Many times, prospective employers and landlords will also check your credit report to see if you're responsible with money.
- Read the credit card statement as soon as it comes. What to look for:
- Are all the charges yours?
- Is the interest rate the same?
- Have you incurred any fees?
- What's the balance?
- Is the balance going up or down?
- Use a card, pay the balance. "Students shouldn't charge more than they can afford to pay off at the end of the month," says Ken Paulsen, author of "Living the College Life" and adjunct professor of journalism at New York University. His advice: Evaluate what you need and distinguish that from what you want. "There's nothing wrong with wanting something costly," Paulsen says. "Ask yourself: 'can I afford it? How will I pay for it?' And the answer is not, 'With my credit card.'"
- Forgo cash advances. Cash advances are a great way to get stung because there are too many ways they can go wrong. "Nobody should ever use a credit card to withdraw cash," says Brock. "There is no grace period. There are almost always fees. The interest rate is usually quite a bit higher. It is a very expensive, inefficient way to get money."
- Know that card companies exchange information. If you have more than one credit card account, there's something you have to know. Make a mistake with one card (late payment, missed payment, etc.), and the other card could raise your rates, too.
- Don't just make minimum payments. Avoid the temptation to run a bill now and bank on paying it off later. If your plan is to charge, make the minimum payments while you're in school, and pay off the balance after graduation, you might want to rethink it. "With minimum payments, you're playing the game on their home turf," says Brock. "It's a joke."
Even though you will have a salary, you'll also have to pay all your own bills. "Students often think it doesn't matter how much debt they run up because they are in college, and they're going to get a great job and can pay it back," says Savage. "They don't realize how painful that will be." And by that time, "often the credit card debts can end up being the cost of a car payment," she says. Plus, years of making only the minimums also won't do great things for your credit rating.
- Be prepared to stand up for yourself once in a while. Has a card company hit you with a penalty rate or fee because you slipped up once? If you call right away and are persistent, you could very well talk your way out of it. "I have found that you can be amazingly successful on the phone with credit card companies, especially if you owe them money," says Brock. "And if it's only the first time, they will usually waive (the penalty)."
Keep working your way up the food chain, and be polite. If they are threatening a rate increase and won't back down, let them know you're willing to switch cards and take your money elsewhere, says Brock. And mean it.
- Look out for those warning signals of too much debt. Three signs you've charged too much: you can't pay off the balance at the end of the month, the balance is growing or you're only making minimum payments. The solution: Stop using the card. Analyze what money you have and whether you can pay it down. And ask for help if you need it.
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