Congratulations! You have just come into a couple hundred bucks for free. Time to go spend away. Well actually, not quite. This money is not free and unfortunately loaning it is not even free. Chances are that if you are a college student, credit card companies are literally throwing themselves at you around campus so that you will accept their card with an “unbeatable rate.” It feels like an honor that someone is willing to loan you money and provide you with credit; believe me, that could not be further from the truth.
Credit Card Basics
Before I discuss on how young people should handle credit cards let me just inform you about a few things you must know about credit cards.
It is not free money. This is probably the simplest piece of advice, but ultimately the most vital to understanding credit cards. Next time before you purchase that $150 pair of jeans at the store with a quick swipe of your credit card, go to a bank machine and pull out the $150 in cash from your active withdrawal account. Now go back to the store and see if you can give away that $150 of cash just as easily as you could swipe the credit card. It hurts to hand over cash but swiping a card is the most painless activity.
Surprisingly low interest rates are a limited time offer. Obviously the companies will never tell you this until you rack up a little debt a couple of months down the road and realize that your rate has been nicely jacked up to 18%. Introductory rates are simply used to lure you in and get you into the habit of using their credit card and building a brand identity.
Minimum payments will take you years to pay off. When you get your credit card statement and you are shocked to see how low your minimum payment is, it’s for a reason. This minimal payment will ensure that you are paying off this purchase for a long time to come at those nice interest rates.
Anyone will give you a credit card. Sorry to break it to you but as long as you are of legal age odds are you will receive at least a little bit of credit. They may only offer you $500, but nevertheless you have a great chance of obtaining credit. Usually all it takes is for you to fill out a quick form and it usually comes with an amazing gift (water bottle, teddy bear, etc.) or a credit card bonus.
Now it is time to discuss the biggest myth young people have in regards to credit cards, “I am working on building my credit.” I am not saying that you shouldn’t worry about building your credit but do not lie to yourself. The trend I have noticed is people will justify an unnecessary purchase by claiming they are doing it to improve their credit rating. Purchase something if you need to, not because you feel the need to “build your credit.”
How to Handle a Credit Card
- If you are going to use the “building my credit rating” excuse to purchase something make sure you have the cash on hand. All that you should have to do is go home and transfer the funds from one account to the other (online or in person).
- There will be times of extreme desperation, it happens to all of us. At this point use a credit card very sparingly as a means to survive, not to try to upgrade your lifestyle during a rough patch. During rough times a credit card should be used for purchases like food and any other necessity of life. Hopefully you do not hit rough financial times by applying the valuable advice from PT Money and Studenomics. However, in the current volatile economic state anything can happen, so if you must use your credit card to survive then go ahead and be wise.
- Get a low limit, not the $20,000 or any other ridiculously high limit that a credit card company may try throwing at you down the road. I still remember the day when a friend from school came bragging about how he got approved for a $15,000 line of credit. The disaster that followed led to this poor guy living the lifestyle of a celebrity and purchasing anything imaginable on credit. I do not want to see this happen to anyone again, so if you realize that you are not strong willed then get the lowest limit possible. Maxing out a $500 credit limit on clothing is not as bad as maxing out a $1,000 credit limit on clothing. Apply for a student credit card with a low limit.
- If your goal is to build your credit then do it the old fashioned way. When someone in your family or someone you truly trust is about to make a major purchase then convince them to use your credit card (obviously with the cash upfront). Do not build your credit by justifying pointless purchases to yourself.
- Leave it at home! I cannot stress how important it is to go to a mall without your credit card. Shopping Centre’s have some of the best sales people around and there is a good chance they could convince you to grab an iPhone at the hot new price for a limited time only. Even if you do get convinced into the limited time offer, you will not be able to make the purchase without your credit card. If you are an avid online shopper then what can I say? Maybe you should leave your credit card with one of your parents.
This is an article from MD, who writes over at the new personal finance blog, Studenomics.com. MD is a young gun with a lot of experience on what students want.
Photo: by The Consumerist