9.3 Using Credit Wisely: The Credit Card Trap
As a first-year freshman, you may not have a credit card, but you may graduate with at least one. While it is advisable to establish your credit history while you are in college, there are some stipulations to applying for and using credit cards in school. After all, a little careless spending over the next four years can accumulate to a mound of debt before reaching graduation.
It can be tempting to fill the gap between income and expenses with credit card purchases. However, expenses do not disappear once they are charged to your credit card—quite the contrary. Not only can expenses mound up quickly with the ease of using plastic, but you will end up paying the actual purchase charges plus interest.
It is wise to limit yourself to one major card and reserve it for emergencies only. Before you use the card, discern whether you really need the item(s) or service(s). Consider whether you will be able to pay off the monthly balance in full. Failing to pay off the monthly balance will result in interest charges, which is essentially giving money to the credit card companies (Federal Deposit Insurance Corporation, 2005).
The terms and conditions of credit card agreements can be tricky and should be treated with caution. Credit card companies are in the business of making profits through high variable interest rates. In 2009, President Obama enacted several credit card reform laws known as the Credit Card Accountability, Responsibility, and Disclosure Act (a.k.a. Credit CARD Act). The legislation was created to prevent banks from using unfair measures to extract high interest rates from consumers. The Act, which went into effect in 2010, will implement many new changes, including:
- Credit card companies must give cardholders a 45-day notice of any interest hike.
- If a cardholder triggers a higher interest rate because their bill is 60 days late, the previous rate must be reinstated after six months of on-time payments.
- A ban on double-cycle billing—the calculation of interest over two billing cycles.
- People under the age of 21 must prove their income, have a co-signer, or pass a financial literacy course to get a credit card.
- Credit card companies cannot charge over limit fees unless the cardholder has consented to exceeding their credit limit.
Although it is discouraged, if you find it necessary to apply for a credit card, you should take a few things into consideration (Federal Deposit Insurance Corporation, 2005).
- Annual Percentage Rate (APR): The APR or interest rate is the percentage you will be charged on the unpaid balance of a credit card. Shop for the lowest APR because a higher APR results in a higher monthly payment.
- Default Rate: The default rate is the new interest rate you will be charged if you miss a minimum payment, pay with a check that bounces, exceed your credit limit, or if you submit a late payment.
- Credit Limit: The maximum amount you can borrow at one time is your cred