Avoiding those plastic perils
Whether parents like it or not, 4 out of 5 kids graduate from college with something more than a diploma: a wallet full of credit cards. By senior year, the average undergraduate has racked up more than $3,200 in debt, spread out over six cards. Based on a typical interest rate of 21 percent, such a debt accrues almost $700 in annual interest charges.
Yet even if students are intent on getting plastic (which they are), and even if they occasionally run up balances (which they do), there are ways to reduce some of the costs of credit. While adults have been taught to shop for credit cards based on rates, rebates, and fees, students typically aren't so choosy. They simply sign up with whichever bank sends them a preapproval letter or whichever booth on campus flags them down with a juicy enticement. "Don't automatically go to the first campus booth that's offering T-shirts or Slinkys to pick your card," says Jim Tehan, a spokesman for Myvesta.org, a credit counseling firm in Rockville, Md. Parents should help their collegebound kids shop for a card with the best terms.
For a list of banks willing to extend credit to students, visit Bankrate.com. The trick is to focus on cards with the lowest rates, not rebates, since kids don't need incentives to spend. The typical student may pay a rate between 18 percent and 21 percent, but some banks charge less.
Keeping tabs. A debit card, which deducts money from a bank account, offers some of the conveniences of a credit card, and students may want to use one for smaller, frequent purchases. Of course, another alternative is to give kids an additional credit card on a parent's account--a sure-fire way to monitor spending and payments.
But there is a benefit in a student having his or her own card, as responsible use helps build a credit history necessary for post-graduation borrowing to buy cars or homes. Kids should be made aware, however, that mishandling cards can lead to black marks on credit reports, which may mean higher interest costs on those car loans and mortgages.
Many banks will bump up the interest rate because of one late payment. They'll also slap on a penalty fee, which can run as high as $49 a pop. Students should consider taking advantage of the Internet--something they're more than familiar with. Many card issuers offer E-mail reminders and free online bill payment. -Paul J. Lim
This story appears in the April 19, 2004 print edition of U.S. News & World Report.
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