The Financial Student

The Great Debate: Should College Students Have a Credit Card?

Everyone seems to have an opinion on whether or not college students should have a credit card. I’m firmly in the “Yes, they should” camp.

Why?

1. Learn some self-control – I’d love to be able to max out 5 credit cards and never have to see the bill. But that’s not reality. Get a credit card and force yourself to only buy what you would have with cash. It really shouldn’t be that hard. If you can’t, then yeah, credit isn’t something you should use.

2. Build a credit score – Credit scores, love ‘em or hate ‘em, are here to stay. Most of us at some point will end up applying for mortgage or car loan. A non-existent or poor credit score is only going to hurt you.

3. Get some rewards – There a few rewards cards out there marketed towards college students. Get a few bucks back on books, gasoline, and entertainment every month.

4. Better security – Lose a debit card and your entire checking account can be drained. A thief doesn’t even need your PIN because debit cards can be processed as “credit”. Have a credit card stolen and you haven’t lost any of your own money.

5. Convenient – It makes sense to carry around more than one form of payment. A debit card, credit card, and some cash ensures you’ll always have an accepted payment method.

I understand that some people make mistakes and get themselves into a ton of debt. That’s obviously bad. But don’t tell me I shouldn’t have a credit card just because other people don’t pay off their balance every month. And of course, no typical personal finance expert would ever say the real truth – graduating college with a few thousand in credit card debt isn’t the end of the world. Not a great situation to be in, but not devastating either.

Plans for My First Credit Card

My Discover Student credit card came in the mail last Thursday.

I know anyone who’s had to deal with credit card debt, and Dave Ramsey of course probably has a few issues with that sentence. But don’t worry. I have no plans to rack up any kind of balance that I can’t pay off at the end of the month. I’ll even shred it if I find myself spending more than I can afford.

For now, I’m only using the card for things I was planning to buy anyway: Cedar Point tickets, gas, normal eating out, and some stuff for college. The best part, besides being able to hang onto my money for an extra 30 days, is that I’ll be earning 5% cashback. Not a fortune, but who would turn down free money? I also have no interest on all purchases for 6 months, but I don’t plan on taking advantage of that benefit. I don’t want to fall into the “Oh, I don’t have to pay for this for 6 months!” trap.

Once I get used to making a lump-sum payment every month, I’ll consider adding more impulse type purchases to my credit card. For now though, I’ll keep using cash or my debit card.

What was your first credit card? Did you use it responsibly or did you get into trouble?

Now I’m Good Enough For You, Discover Card?

I mentioned a few months back, when I turned 18, that no bank would approve me a credit card. I applied first for a Visa card from CitiBank, then a Speed Way card from Chase, and finally I attempted to obtain credit from Discover Card. All of them rejected me for similar reasons: low income, no credit report, and really low income.

Imagine my surprise on Wednesday when I received a credit card application from Discover in the mail. They were actually soliciting me this time. So I went online and applied (again) using my “special” “invitation code”. I click submit and expect to read a message saying “Sorry, you’re not credit worthy.” Blah blah blah.

Instead, they tell me that I need to call to confirm some information. I call, but I don’t think it’s going to result in anything.

Me: Yeah, I applied for a student card that you mailed me and the computer said I needed to call or something?

Discover Card Lady: Oh no problem. Let me just look up your information. May I have your name and social security number?

Me: No problem. *Gives them to her.* (You didn’t think I was going to put this in the post did you?)

Discover Card Lady: OK, I’ve pulled up your application. We just need you to fax us something like a utility bill or bank statement to verify your address. Also, a class schedule from your college to verify that you’re a student.

Me: So…am I already approved and you just need this to complete the process? Or… (and where will I find a fax machine?)

Discover Card Lady: Yes, as soon as we get those documents, you’ll receive your card in 7-10 business days.

Me: Awesome. Thanks!

I thought Discover was just tempting me. Showing off cool card designs and attractive cash back rewards. Oh and no payments on new purchases for 6 months. Just like any ol’ tease would do. But nope, it seems like she actually wants to seal the deal with me. OK, I think I’ve taken that metaphor as far as it can go.

Now that some corporation has decided I’m credit worthy, I’m going to buy so much stuff and only make the minimum payments for as long as possible.

Just kidding.

But seriously, where can I find a fax machine? It’s 2010. Does a dial tone even exist anymore?

Paid Off Credit Cards – Now What Do I Do?

Lora writes in:

After careful planning and a little personal discipline, the end of my credit card debt is within sight. However, with each passing month as I approach my goal I’ve felt an uneasiness surrounding my impending victory. What happens now? Aside from obviously attempting to not fall into the trap of credit card debt again, I’m uncertain what the next best course of action would be to make my credit cards work for me rather than against me. I’ve read that not using credit cards on something of a regular basis can hurt your overall credit worthiness.

I currently have 2 credit cards:
1. low limit, but carries reward options (15.99% interest–paid off)
2. fairly high limit and no reward options (13.24% interest–pending pay off) ]

How do I know how often I should use them? Does the allowable limit of the card affect credit worthiness and would asking for a lower limit help anything? Is there any way I could possibly bargain for a better interest rate?

First of all, I’d like to congratulate Lora on working to reduce her credit card debt. Good job!

The best way to reintroduce credit into one’s life is to do it slowly. Lora could start using her credit card only for gasoline. As time goes on, she can start charging regular bills like her cable and groceries in order to take advantage of the rewards.

I don’t think Lora needs to worry much about how often she uses her card(s)as much as she needs to worry about what she’s using them for. Going shopping for clothes everyday thanks to MasterCard isn’t a good plan obviously. The best way to use credit cards is for things that you’ve already budgeted for and have saved for. Once that’s been accomplished, the credit card is just acting as a more secure and convenient payment method.

Lora should NOT ask for a lower credit rating. If anything, she should ask for a higher one as long as it won’t tempt her to spend more. Credit ratings and scores take into account something called the “debt-to-credit ratio“. Basically, you want this number as low as possible. Why? Let’s say you have a $10,000 credit limit, but you charge roughly $5,000 per month. Your ratio is 50%. But if your credit limit was $20,000, your ratio would only be 25%. Lenders often assume that a high ratio means you’re using more credit than you can handle and comfortably pay back.

Asking for a lower interest rate is a wise thing to do if you’re still carrying a balance. Simply call your bank and ask for a rate reduction. The worst that can happen is they say no. Lora’s 13.24% rate actually isn’t too bad considering some cards can carry rates of 30% – or more!

Finally, if I was Lora, I would ditch the card with no rewards. She doesn’t have to cancel it, but she can just put it in a drawer somewhere and forget about it. That’ll help keep the ratio I talked about above lower. Then, I would search for the best rewards card I could find. With good credit, Lora could try to open a Chase Freedom with offers up to 5% cash back. Remember that interest rates should be irrelevant because you won’t be carrying a balance anymore.

I love receiving questions from readers. Do you have a personal finance question that you’d like to me to answer? If so, simply click the “Contact” link at the top of the page.

5 Credit Cards Fees that Can Make Plastic an Expensive Way to Pay

Everyone’s aware that credit card companies and issuers primarily make money by charging interest on the amount you borrow. The specific rate charged can range from an introductory (meaning it expires after set period of time – usually around 6 -12 months) 0% to a you’re-never-paying-off-that-balance 79.99%. But interest rates aren’t the only way the credit card industry makes a profit. Below are additional methods of getting you to part with your hard-earned cash:

1. Late payment fee

Forget to mail in your check? Internet outage and you can’t login to online banking? That’ll be $39 please. The new credit card laws have somewhat cracked down on bogus late fees – ones where your payment was considered late just because the processing center’s mail didn’t come until late afternoon.

2. Cash advance fee

Cash is king. Because of that (or maybe because of the potential profits), credit cards can usually be used at an ATM to make a withdrawal against your line of credit. This is where you get dinged twice. Once for the fee, usually around 5% of the amount you borrow. Plus the higher interest rate you pay on what you borrow.

3. Balance transfer fee

If you’re carrying a balance on a high interest rate card, you can transfer it to another card with a lower interest rate. But this isn’t a freebie. The new card issuer will often charge you 3% to 5% of the balance transfer as a fee. While this is an upfront cost, balance transfers can save you money by reducing the interest you pay. Just do the math beforehand to make sure it’s a good deal.

4. Exceed credit limit fee

Shop until you drop and you’ll likely go over your credit limit. That’ll be another $39. This can get expensive quickly because if you just make the minimum payment, your balance will only be slightly below your credit limit. That means it’ll be extremely easy to go over again

5. Annual fee

This fee is simple – you pay it in exchange for being given the privilege of using a particular card. Annual fees had all but disappeared in the past 10-20 years, but the recent credit crisis has seen them make a small comeback. Most average everyday student or rewards card are still annual fee free.

While these fees are ridiculously expensive, they’re all optional. Just as paying interest is. You can choose whether to carry a balance over many months and years. You can choose whether to go over your limit. You can choose to get a card without an annual fee. You don’t even have to have a credit card if you don’t want to. But, if you choose to have a credit card like most people do, it’s wise to know all of the fees that can wreck havoc on your finances if you aren’t careful.

How to Pick Your First Credit Card in 4 Steps

While I hate debt, I like credit cards. While I’m still waiting on Citi to review my own application, I’ve put together some tips on how to pick out your very first credit card.

1 – No Annual Fee

Some cards charge you just for the privilege of having it in your wallet. This is unnecessary. Any good student credit card won’t have an annual fee.

2 – Rewards

A credit card issued to someone with a limited credit history isn’t going to have a great rewards program. But that doesn’t mean students lose out on all of the action. Check out Citi’s mtvUTM Platinum Select® Visa card to earn points for maintaining a certain GPA and purchasing books. Cash back, though, is usually better, simply because it’s cash.

3 – Widely Accepted

Your card is useless if the store won’t accept it. For your first card, stick with Visa or MasterCard if possible. Discover and American Express are still accepted most places, but you could be out of luck when you need gasoline in the middle of nowhere.

4 – Go With a Brand

If you’re nervous about having your own credit card, consider getting a branded one from your favorite gas station and only use it there. Most of these companies offer a discount on their product when you use their card. However, it’s probably not a good idea to get an American Eagle card or Apple card. Those are just going to tempt you to buy Stuff you don’t need. Once you’ve built up your credit rating, you can consider getting another card with better rewards to use for other purchases.

Bonus

You’ll notice that I didn’t say anything about interest rates. That’s because they don’t matter. You aren’t going to go do something stupid and carry a balance now are you? Good. Interest rates for someone with no credit history can easily reach 20%-30%. But guess what? As much as Citi Bank or Bank of America would like to, they can’t calculate interest on a balance of nothing.

I Better Get Approved for that Credit Card, It’s Not Like I’m Unemployed or Anything

I’ve been waiting weeks to have my application for a Citi Forward student credit card approved (or denied…). I applied for it shortly after my 18th birthday and received an additional form in the mail to fill out a few days later. Citi needed me to authorize the IRS to provide my tax receipt as proof of income. No doubt, this was the CARD Act of 2009 in action: No more 18 year olds getting credit if they don’t have an income.

I sent that form in ASAP and haven’t heard anything from Citi. Nada. Not one email, phone call, or postcard letting me know what’s going on.

Maybe….

A. Citi found out that I’m currently unemployed

B. Citi decided my income from part-time work in 2008 wasn’t high enough

C. Citi reads this blog and realized that I won’t be carrying a balance so I won’t be paying any interest

At this point, I honestly can’t say for certain what is taking them so long. I suppose it’s possible the IRS is dragging their feet and taking their good ‘ol time sending my tax information over.

Whatever the reason, I want my card! And I want it now!

Just kidding, I don’t want it that bad. But I would appreciate getting approved. I’d like to stop using my debit card for purchases, except for when I need some cash flow from the ATM. Having a credit card will let me accumulate some rewards and I’d rather thieves steal Citi’s money than the cash I have in my checking account.

Don’t leave me hanging Citi Bank!

The Daily Show Explains the New CARD Act

I just found this video while hanging around The Daily Show’s website. It’s a few weeks old, but the commentary on the new CARD Act is fantastic.

I agree that the banks were doing some pretty shady stuff. I mean, changing you bill due date so you’d purposely have to pay a late fee? Come one. Or how about jacking up your interest rate on purchases you already made. That is 100% bullshit. Could you imagine the riots that would take place if grocery stores starting telling customers: “Remember that gallon of milk you bought two months ago? Yeah…um…we’ve changed the price. You owe us 15% more now.”?

But on the other hand, no corporation was forcing anybody to swipe their credit card. People figured out all by themselves that they needed a new plasma television or shiny iPhone.

It’s not easy to hear, but no one truly deserves those things. People want stuff now and credit card companies are more than willing to give it to them. Rising above the temptation of stuff I suppose is the only real solution.

Favorite part of the video, by the way:

Why? Fuck you, that’s why!

5 Great Benefits Provided By Credit Cards

As I’ve mentioned in the past, I think credit cards are a good way to help manage your money. In fact, I applied for a student Visa card the very week I turned 18. Credit cards have numerous benefits, which I feel outweigh any possible disadvantages, so I thought it’d be useful to detail those positive attributes.

Ease of tracking – A big part of personal finance is knowing where your money is being spent. Credit cards allow you track your spending effortlessly. Simply connect the card to Mint or Quicken and your transactions will automatically be downloaded. Or, just head on over to your credit card’s website to see what goods and servies you’ve purchased.

Security – All major credit cards come with “Zero Liability” polices. This means that you won’t have to pay a single cent if your card is ever stolen. Most debit cards come with this protection too, but there’s a catch: while the bank is figuring out what happened, your money is GONE. You might have to wait weeks for the bank to replace your money. With a credit card, none of your money has gone anywhere.

Rewards – A ton of cards will actually pay you to use them. There’a multitude of options provided: cash back, airline miles, or points. Receiving 1% to 5% cash back or accumulating points won’t make you rich, but there’s no harm is getting a slight discount for things you were going to buy anyway.

Time savings – Swiping a card takes less time than writing a check. Plus, there’s no change that has to be counted and given back to you like there is with cash. Standing behind someone writing a check drives me insane these days. Especially the people who sign their name with the same concentration and effort they would use to sign the Declaration of Independence.

Purchase protection – The main credit card companies offer a ton of protection on almost anything you buy. MasterCard will double the standard warranty that comes with a product. Visa will reimburse you up to $500 dollars if something you buy is damaged or stolen. American Express has you covered for up to $1,000 dollars.

These are all great benefits that you won’t receive with cash or a check. So once Citi Bank approves my application (they actually sent me a letter asking for a copy of my tax return, probably due to the new CARD Act), I’ll be using my Visa for just about every purchase.

I’m 18! What Should I Be Doing With My Money?: Open a Credit Card

Before concerned parents and people whose lives were “destroyed” by credit cards start freaking out, realize that I’m simply advocating that an 18 year old open up ONE credit card, not eight. Also, only people with an income should be opening one.

Why Open an Account?

Having a credit card is beneficial for a variety of reasons. Here are a few:

• You begin building a credit history (something that banks use to decide whether or not to give you a loan)
• They’re convenient; just sign and go.
• Allows you to easy monitor what you spend money on; remembering where you spent cash can be difficult.
• Safe. Card stolen? Call up the bank and tell them. Charges will be reversed.
• Rewards and cash back. (Only applies if you pay off the balance in full every month.)

Why Kind of Card Should I Get?

There are hundreds, if not thousands, of different cards available. 18 year olds should probably stick to a student card or store card, for now.

I’d recommend just getting a simple, no frills student Visa or MasterCard that you can use almost anywhere. Opening up a store credit card (a card that can only be used at a certain store, like a Macy’s or Kohl’s card) can also be a good way to enter the world of credit, but they aren’t super flexible.

A better idea might be to open up a “branded” card. This is a card that’s offered by a certain company as their own card, but it still displays the Visa or Mastercard logo and can be used anywhere those cards are accepted. Gas stations often have these types. For example, I currently have a Mastercard that’s branded by SpeedWay (I’m an authorized user on my dad’s account) that I use to purchase gasoline, but I could also use it somewhere else in an emergency.

These types of credit cards are a good way for young adults to build credit because you can ease into using them. Just charge your gasoline to the card and pay the bill off as soon as possible. You’ll build credit, but won’t pay any interest and you’ll get comfortable paying the bill.

You want the following in any card you open:

• No annual fee.
• Widely accepted. American Express and Discover aren’t quite there yet.
• Cash back, if possible. (Note: DO NOT BUY STUFF TO JUST GET POINTS! Cash back is for things you were going to purchase anyway, even if you didn’t have the card.)

What if I Notice Myself “Shopping Until I Drop?”

STOP USING THE CARD. IMMEDIATELY.

If you’ve rung up a bill that you can’t pay in full within the current billing cycle, cut up the card or literally freeze it by putting it in a zip-loc bag filled with water.

To prevent this from happening in the first place, you might want to let your parents or someone else you trust take a look at your bill. You might not have realized that you started buying iTunes songs like it was your job. A responsible third party will.

After you’ve have time to beat the shopping bug, carefully re-introduce credit into your life. Buy just one, small thing every month and pay the bill as soon as you get home. Self-control can be difficult to master, but it can be done.

Wrap Up

Credit cards can be dangerous, sure. Some people will abuse their lines of credit. But you don’t have to. I look at credit cards as a tool. Hammers can certainly hurt people, but they can also help craft a home. There are good and bad qualities in almost everything. But opening a credit card can be a great step into the adult world. You can become responsible with credit now, without learning the painful lessons of interest charges and late payment fees that so many others faced. You’re an adult. Be responsible.

If you’d like, you can jump forward to the next post in this series: Learning the Basics of Money Management or jump back to the previous post: Grow Up.