Students often get their first credit card in college.
The Credit CARD Act of 2009 makes it more difficult for college students to get a credit card on their own. This legislation requires credit card applicants under age 21 to either have an independent means of repaying the debt or a cosigner over age 21.
Some parents will make the student an authorized user of one of the parent's credit cards instead of cosigning the student's credit card application. Adding the student as an authorized user lets the parent monitor the student's spending. Either way, the parent is responsible for the charges on the student's credit card.
Another option is a secured credit card, where charges are limited to the amount of money on deposit with the credit card issuer. Fees and interest rates may be higher with a secured card.
Otherwise, underage consumers may be limited to using a debit card. A debit card can be used like a credit card. But, instead of borrowing the money when an expense is charged to the card, the money from debit card purchases is immediately withdrawn from the student's bank account.
Students who get a credit card should never carry a balance on their credit cards. If they can't afford to pay off the balance in-full each month, they are living beyond their means. The interest charges can quickly add up if the student doesn't pay the bill before the end of the grace period.
Students should shop around for the lowest-cost credit card at web sites like Bankrate.com. Students who do not carry a balance should look for credit cards with no annual fees and which offer a rebate. Students who carry a balance – as noted above, a really bad idea – should look for the card with the lowest interest rate.
Paying with plastic feels the same, regardless of whether the student is spending $5 or $500. This makes it harder to exercise restraint, since it doesn't feel like one is spending money. Some students should delay making large purchases for a day or two to think about the purchase. Is the purchase really needed? Students should also cap the amount of money they can charge per day. Tracking all spending also helps by increasing awareness of the amount spent.
Always pay the credit card bills on time. Not only will a late payment result in late fees, but some credit card issuers increase the interest rate when a credit card holder is late with a payment. Mail the payment at least a week before the due date or submit the payment online. Making payments on time will help the student build a good credit history. Students should sign up to have the monthly payments automatically transferred from their bank accounts, so that they will be less likely to be late with a payment.
Pay off the balance in full each month. If a student pays only the minimum balance due each month, it can take a decade to pay off the debt, and the total interest paid may exceed the amount borrowed, effectively doubling the purchase price.
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