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First Credit Step Can Be A Doozy So Show Kids How To Do It Right

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The Tampa Tribune

Published: October 14, 2007

So, your college student finally needs a credit card and, wisely, you want to make sure she gets a great deal and avoids falling into traps.

Alas, all too often, young adults stumble at the start. They succumb to the free T-shirt come-on and choose a card with high annual fees. Then they get nicked again and again with charges for large monthly balances. Before they're home for winter break, their credit history is a wreck, and those freebies suddenly look terribly expensive.

I've written about the perils of putting plastic in the hands of teens and young adults before they've learned to manage cash. Better to start slow by balancing a checkbook or using a debit card.

In response, I received this e-mail from Myrna Hernandez of Stockton, Calif.: 'My husband and I share your philosophy on credit, and our son and daughter had checking accounts in college, but no credit cards. However, since they do appear to be a necessity of modern life, you might suggest to your readers that their children obtain a credit card during the last term of their senior year before graduating.'

Her point is that having a credit card can help establish a credit history that will open doors when it comes to renting an apartment, purchasing essentials and dealing with emergencies.

If your son or daughter is edging toward applying for plastic, arm them with information so their prospects for success with credit are good.

There are many good teaching tools. Consumers Union, the nonprofit publisher of Consumer Reports, recently unveiled a guide to help those applying for a credit card for the first time (www.consumers union.org/finance/College CCTips.htm).

Consider this primer from Consumers Union on how to apply for and use credit cards:

Keep it low. Shop for a card with a low annual percentage rate. The higher the rate, the more the credit will cost you for failing to pay off the balance every month. In addition, beware of cards that have a low introductory rate that goes up a few months later.

Stay off the fee way. Look for a card with no annual fee, or a low one. This is the fee the credit card company charges every year just for issuing a 3 1/2 -by-2-inch piece of plastic.

The best deal? A card with no annual fee and a low interest rate.

Dig into the default rate. You don't hear much about the card's default interest rate, but overlooking it can be costly. The default rate kicks in when you make a late payment or pay less than the minimum amount required. Your interest rate could double or triple, making it a quick way to turn a small balance into a big one.

Be ready for change. Understand the card issuer's change-of-terms policy. Many financial institutions reserve the right to change the terms at any time and for any reason.

Danny Shah, a reader from Florida, amplified that point.

'Before issuing you a credit card, they (offer) you all the discounts, air mileage and low interest rates,' Shah wrote in an e-mail. 'A few months down the road, they send policy revisions calling out a different picture.'

His advice: 'Cancel the card.'

Pay your balance. The key is to pay it in full and on time. But if you can't, at least pay off as much as you can afford, and always pay more than the minimum payment required.

If you pay just the minimum each month, you'll be paying for many years. Consumers Union offered this example: If you carry a balance of $1,000 with an 18 percent annual percentage rate, it will take seven years and an additional $1,731 in interest to pay it back.

Keep in mind that 79 percent of undergraduate college students don't pay their balance in full each month, meaning they regularly pay interest on that remaining sum of money, according to a survey from student-loan company Nellie Mae.

Limits are beneficial. Carry a low credit limit. Don't sign up for a card with a high credit limit of, say, $5,000 to $10,000. That's a quick way to overspend. Start with a low limit of $500 that can be paid on time.

You only need one. Follow the one-card rule. Many young adults assume they need lots of credit cards to build a credit history. That notion is false, financial experts say.

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