Credit Cards: Not free money

Imagine this, you're 30 years old and you're finally paying off all those tacos and pizzas you lived off of in college! If you're like many college students, this scenario can become very real. Learning how to be a responsible credit card holder now can save you from digging yourself out of a serious hole later on. You can pay your rent on time every month, your car insurance and student loans (these are not commonly reported to the three credit bureaus -unless there's a problem (Trans Union, 800-888-4213; Equifax, 888-532-0179; and Experian, 888-397-3742), but if you miss one credit card payment it's on your credit report guaranteed.

Like student loans, credit cards issuers are quick to give plastic to students like there's no tomorrow. The reality is, tomorrow will arrive and problems on your credit can haunt you for seven years, affecting your chances of renting an apartment or buying a new car after graduation. Remember, many employees check your credit upon hiring you!

It's tempting to get credit cards in college and it's certainly easy but what you're signing up for is a high interest loan. The bottom line is credit cards have fees, here's the breakdown on common fees:

• Annual fee: Many credit issuers charge yearly membership fees of anywhere from $20 to $100.
• Finance charge: This is an interest charge (can be as high as 20 percent) on the unpaid portion of your bill each month.
• Late payment fee: Not paying on time can also result in higher interest rates.
• Cash advance fee: Avoid cash advances-fees are high, and interest rates will usually skyrocket.

Debit cards can be a wise alternative to credit cards for many students. This way, money is subtracted directly from your checking account, and the idea is that you can't spend more than you have. However, banks will often allow to spend a little bit more then you have in your account (even a few pennies) while charging you a fee (around $30), and this can really add up if you're not careful. This practice has become a major revenue source, netting banks more than $10.3 billion a yea

Credit Card Shopping

The first step is to be brutally honest with yourself, are you responsible enough to handle a credit card, will you have the funds to pay your debts? If you decide no, then a debit card may be your best bet for now. If you decide yes then follow these basic steps:

• Comparison shopping is vital, check out websites such as www.bankrate.com and www.creditcards.com to compare credit cards and make informed decisions.
• Student credit cards will most often offer introductory teaser rates. Look beyond these rates and find out what the APR (Annual Percentage Rate) will be in the long run. If you pay your monthly balance then you won't have to worry about interest rates.
• Study the fees, credit card companies will charge you for anything and everything. You'll want to research the grace period given from the time you make the purchase to the time you are charged interest, will you be charged for not using the card (inactivity), look at the annual fee and fees for late payments, cash advances and going beyond the credit limit.
• Experts agree that inexperienced credit card users should be hyper-aware of their spending habits and maintain a budget. The recommended allowance is to spend no more than 35% of the maximum available credit limit each month.
• Treat your credit card shopping and payments like you would handle studying and test-taking, ultimately it will add up to your total score, your credit score much like your G.P.A.

There are advantages for students who use credit cards responsibly. Having established a good credit rating and history in college can enhance your ability to buy a car, rent an apartment, get a job and, eventually, buy a house. Credit cards also provide security in case of an emergency (spring break is generally not considered an emergency), you're also less likely to lose cash when traveling or buying a large purchase and you'll feel a greater sense of personal power and responsibility. Credit cards also come with such perks like frequent flier miles!

How Credit Cards Work

When you get a credit card you are expected to pay a minimum monthly payment (in the terms you agreed to when signing up for the card). The minimum payment required monthly is generally 2% of your outstanding balance. The more often you pay the minimum payment; you are getting yourself into more and more debt by the month. If you make a late payment, you will most likely be charged 2% of the outstanding balance. It's easy to see how over time this can really creep up on you to the point of no return.

A credit card's grace period is the amount of time you have to pay the balance before interest is added to the balance. Grace periods are generally from 20 to 30 days depending on the type of credit card and the issuing bank.

From the banks point of view, it's in their best financial interest for you the consumer to carry the greatest amount of debt you can repay. If you pay only the minimum, you'll pay even more interest for a longer period of time. What this means is, you'll be paying for your old college t-shirts, pizza, spring break vacations and that college keg or two for decades.

How Credit Cards Make Money

Credit Card companies get away with murder these days. Read the fine print before signing up for any card. Credit issuing companies use a variety of questionable methods to take away your hard-earned money. Credit issuers make a point to regularly check your credit report. If they see something they don't like, regardless if you have never made a late payment to the card issuer, they can and will increase your interest rate.

Do you often get credit card offers in the mail, advertising strikingly low interest rates on their premium card? You'll want to read between the lines on these offers. Often times, the card issuer will send a high-interest non-premium card if you don't qualify for the card offered. The "you've been preapproved" for a credit card letter in the mail doesn't really mean that you've been preapproved to apply for a card. You can still be turned down and this in turn can negativity affect your credit score.

Late payment fees can range from $29-$39 dollars. Two or more late payments will lead to a higher interest rate. Inactivity fees can cost you $15 and up if you haven't used your card in six months. Spend one cent more than your limit allows and you'll be paying an over-limit fee of $25-$39.

The bottom line is that many of these practices are not fair to the consumer. Many credit card holders are not even aware of the games credit card companies play. Consumers use credit cards but are confused by their own credit card agreements. This is why it's so important to keep track of your bills, fees and charges. For a newbie to the credit card world, I would recommend sticking to one major card, and always stay on top of your payments and carefully review your statements. If you see anything questionable on your statement, call the card issuer to discuss the matter as soon as possible. Often credit card companies will work with you if you notice a problem. Unfortunately many of us are just confused and don't address the problems, especially if you're dealing with five or more credit cards.

Check your credit report

The bottom line is to be smart about your credit choices. Always be informed and do plenty of comparison shopping. You'll have so many opportunities to borrow money while in college. Never borrow more than you can pay off or more than you need. Going to college is about investing in your future and investing in it wisely. The choices you make today will affect the rest of your life. Never take your financial situation lightly and always talk to college advisors and parents before making any big money decisions. The web is a great place to research student loans and credit cards. It's always a great place to network and talk to peers about their experiences and recommendations.

You can check your credit online. Using this service does not decrease your credit score; it's called a "soft" credit pull. A "hard" credit pull is made by lenders and directly affects your credit score. When you apply for credit, the credit issuer will pull your credit history, this inquiry can count anywhere from two to five points off your credit score.

Annualcreditreport.com website is jointly operated by the three credit reporting companies, Equifax, Experian, and TransUnion. Under the Fair and Accurate Credit Transactions Act (FACT Act), consumers can get a free credit report once every 12 months from each of the three credit reporting companies.

The goal is to establish credit, pay bills on time, spend only what you have and always think about your future. Your financial history will stay with you forever so research, think and always make informed decisions.