Establishing Good Credit

Going to college means managing your own money-and credit card companies know it. Before you sign-up for a credit card, make certain you understand your obligations.

There are some valid reasons for getting a credit card. A credit card can cover some expenses while you wait for cash from your financial aid plan, part-time job or parents. And if you always pay the balance on time you establish a good credit record, which is critical for making future large purchases.

But let's look at the downside: A credit card can sometimes make shopping too easy. Large balances can build up quickly. You may suddenly find it takes all your extra cash just to make the minimum payments.

And credit is an expensive way to finance an education. Books worth $500, but bought with a credit card charging 18 percent interest, will eventually cost $865-after seven years of making the minimum payment.

Understanding Your Obligations

Here are some terms you'll need to fully understand before you get a credit card.

• Annual fee: Some cards charge an annual fee - anywhere between $15 and $50 - while others may not. Many card issuers will waive the annual fee in the first year, then charge you a fee in a year or two. Banks will sometimes waive annual fees if you've charged a certain amount during the year. Make certain you understand whether or not your card requires an annual fee.

• APR/Interest rate: The APR or interest rate is the percentage of interest you're charged on the balance you carry on the card and cash advances (usually two different rates). It can either be fixed or variable (also called floating). A fixed rate APR is usually higher, but you'll know what to expect for the year. A variable rate is typically lower, based on an interest rate that swings up and down.

• Introductory rate: Some cards offer a super-low introductory rate that will later switch to a higher fixed or variable rate. Make sure you know how long the introductory rate lasts - usually three to nine months - and what the new rate will be. The introductory rate is often terminated if you send a late payment.

• Finance charge: This is the actual dollar amount you'll pay when you carry a balance. It includes interest costs and any other transaction fees. It's helpful to know how this number is calculated. The average daily balance method is the most common. It adds the amount of debt on your account for each day during the billing period and averages it.

• Minimum Payment: This is the amount you must pay to remain current in your payments. If you cannot make the minimum payment, contact one of the credit counseling groups below and your lending institution.

• Grace period: Most credit cards offer a 25-day time period for you to pay off your total balance without paying a finance charge. The grace period runs from the date printed on the bill, not the date you receive it or the date you make a purchase.

• Cancellation: Check with your bank regarding credit card cancellation. Many cards will require you to contact them directly regarding cancellation. Failure to do this can result in you having to pay the annual fee. And if you fail to pay the annual fee, it could impact your credit record.

• Other fees: These include fees for paying late ($20 to $25), charging over your limit ($20 to $25) and getting a cash advance (around $2 or 2 percent of the cash). Make sure you read the cardholder agreement, which discloses these charges.

Tips for Good Credit

As you sort through the applications that cram your college mailbox, here are a few tips:

• Carry only one card. This will keep you from 'maxing out' several cards at high interest rates.

• Read the fine print. Look for the card with the lowest annual fee. Many cards charge no annual fee, while cards with fees may include services you don't need.

• Beware of cash advances. Virtually every credit card charges a cash advance transaction fee-usually $5 or two percent. Your repayments will probably be figured at a higher rate of interest as well.

• Always pay on time and pay the full balance. Most people run into problems when they let balances roll from one month to the other. Make sure you try to pay-off the balance each month. This will also save you money.

• Never miss your minimum payment.

• Check out annual percentage rates. They can vary from single digits to more than 20 percent (especially for cash advances). Some lenders charge a fixed rate; others follow the prime lending rate. Study the applications or run an online search to make sure you're getting the best deal.

• Look for a generous "grace period." That refers to the amount of time a lender allows before charging you interest on the balance due.

• Get a card with a low credit limit. A card with a limit of only $500 to $1,000 will help you control your spending.

If you're having trouble staying within a budget, you might try writing down all your expenses for one month: convenience store purchases, automobile expenses (gas, parking and tolls), meals, tips, soft drinks, etc. You may be surprised at how much money you're really spending.

Credit Problems?

If you've already found that mounting credit card bills are stressing you out, you may need assistance. The organization below offers free counseling about credit.

National Foundation for Consumer Credit (NFCC)
The nation's oldest and largest network of non-profit credit counseling organizations. Call (800)388-2227 to get the number of the office nearest you.
http://www.nfcc.org

This organization can help you design a plan to pay off your debts and contact your creditors. Remember, your credit record will follow you through your lifetime. Make sure to protect it well!