College comes with a daunting financial responsibility: rent, tuition, textbooks, groceries and all the other expenses of daily life.
With recent spikes in housing and food costs it’s even more difficult to afford the student lifestyle. When grants, scholarships and the Stafford loans aren’t enough, students usually turn to credit cards out of desperation, yet they should be wary of what exactly they are getting into.
If you’re lucky enough to have a parent willing to cosign a PLUS loan or private loan, you’ll be set with low interest rates and extra loan money that doesn’t require monthly payments until after graduation. Just remember it does eventually have to be paid. Part of planning for your future is trying to avoid swimming in debt when trying to procure a career in your ideal profession.
If you’re alone funding your higher education, student credit cards seem tempting. They market low qualifications and promise to boost your nonexistent credit rating. According to American Student Assistance, 75 percent of undergraduates with credit cards started the 2004 school year owing an average balance of $2,169.
Advertisements for credit cards do not usually market the downsides. Those details are usually disclosed in fine print that is easily lost beneath a stack of textbooks.
So, for this article, I did some research on the six largest banks in the United States: Chase, Citibank, Capital One, Bank of America, Wells Fargo and U.S. Bank.
The annual percentage rate for a loan isn’t usually decided until after your application is approved. If you don’t have any credit history or you have bad credit, you can expect something around 14.99-20.99 for an annual percentage rate (APR).
This range is incredibly high compared to the average 6-6.8 APR for Stafford Loans. Interest for student loans is also tax deductable, whereas interest from credit cards is not.
Unlike student loans, credit card companies immediately start billing you monthly statements. As though your planner is not already crammed with classes, studying, extracurricular activities and work, you also have to remember to make your minimum payment each month. If you forget, the consequences can be steep.
Late fees range from $15-39 depending on which bank and the balance. Wells Fargo was the only bank that didn’t openly disclose their terms and conditions. When I emailed them as a potential customer requesting the terms and conditions, they replied “a number of factors are taken into consideration when an application is received.”
One of the ugliest boils on the monster known as a credit card is a late fee.
I have a friend who works in customer service at Wells Fargo’s Vancouver call center. Recently she has received an onslaught of angry calls since Wells Fargo raised their late payment fee on all of their credit cards to $50 a pop.
Banks know what the late fees are before you apply because it’s their bread and butter. One thing to be sure of when it comes to the monster: If you look into a credit card where the bank is being elusive with the terms and conditions, look for a less deceptive option.
Over limit fees should also be kept in check. The major banks, excluding Wells Fargo, who wouldn’t disclose their terms and conditions, charge between $19-39.
Being late and going over the credit limit damages your credit, and after the second occurrence the interest jumps to around 30 APR.
Even if your payments are always on time and the balance is always under the credit limit, you are not out of the woods yet. Just for having a few high balance credit cards, you can wind up with a default APR even if you’re an otherwise perfect customer.
From personal experience, I know that Chase is one of those companies that pulls an annual credit report to check your balances with other credit card companies in order to put you into a default APR. This high interest rate is very difficult to pay off as the monthly minimum payment barely covers the charged interest at that point.
Another fee to watch out for is the annual fee. There are enough banks offering student credit cards without annual fees that you should never have to accept a card with an annual fee unless you already have very damaged credit.
U.S. Bank charges an annual fee unless you make a purchase each year. Wells Fargo charges an annual fee for rewards, but Citibank offers reward cards without the annual fee. Getting cash back rewards enhances the credit card experience so that you can make the most out of your money.
There’s nothing more rewarding than earning cash back for spending money and then paying off the balance within the grace period to avoid accruing any interest.
Why do all these fees and debt matter? Because society, as well as the credit card companies, frown at too much credit card debt. School loans are justifiable as investing for the future, but credit card balances are assumed to be from impulsive shopping.
Whether the balance is for something essential or something trivial, anything over 80 percent of your credit limit is damaging to credit, and less than 50 percent is ideal.
Student credit cards can be an easy way to build credit as long as you keep a small balance and remember to pay it each month before the due date. Having an open credit line is often too tempting for college students that are strapped for cash.
Banks are relying on students to apply for cards with good intentions and then go overboard. Just remember that banks are not giving you a credit card as charity. These are greedy corporations who are preying on students’ inexperience with budgeting and paying bills to line their own CEOs’ bulging pockets.
Handling a credit card responsibly is a vital skill for any college student. By keeping a low balance, there’s always credit available in case of an emergency. Paying the amount due each month and maintaining a low balance gives you much needed credit history by the time you graduate.
Not only is good credit history necessary for future loans, but also potential employers often check credit histories when determining between applicants.
Plan for your future. Use credit cards wisely.