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New credit card users need help
People should learn to use credit wisely
Credit card companies are often seen on college campuses, offering credit cards and additional incentives, such as T-shirts or other merchandise. The objective is to get students used to a life of debt. That’s good for them, but bad for those who sign up. Here are some tips for how to use new credit wisely.
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Credit card companies hope for a lifetime of debt
The credit card industry is a profitable business. They lend money at high interest rates and try to make sure that their customers are always in a position to owe them money. It works well; most people in the United States carry a balance on the handful of credit cards they hold. With the average debt approaching five figures, the credit card companies make billions of dollars annually.
Of course, the only reason they make such money is because most borrowers have poor habits when it comes to handling their credit. Failure to pay bills in full and on time is costly, but many, if not most, people do those things regularly. And the companies that issue those cards are counting on that. It lets them raise the interest rates and charge outrageous late fees. When credit card companies set up on college campuses, they often try to entice students to sign up by offering bonuses. Caps, T-shirts, whatever it takes to get people to sign up. They’re not so interested in helping these students buy things without cash; they’re interested in signing them up for a lifetime of indebtedness. And studies show that it works - nearly half of all college students currently hold some credit card debt. The average total is nearly $3000 per student.
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Obviously, a lifetime of maintaining expensive debt is a bad idea. How can people who are new to the credit game avoid this problem? Here are some tips:
- Read the contract. The $5000 limit may sound nice, but the fine print details the cost - there’s the annual interest rate, which probably won’t be all that low, there’s the “default” interest rate, which could be as high as 30%, and there are the late fees that will pile up if you don’t pay on time. And once you pay late, that default rate becomes your regular rate.
- Know how much you can afford to spend - Ideally, you shouldn’t spend more on your card in a given month than you can repay in full. If you can’t pay it back right away, don’t use the card. It’s there for convenience. And your limit isn’t a good guide to how much you may spend. Your best indicator is based on your paycheck, not your limit. And keep in mind that new Federal guidelines will require you to pay back at least 4% of the amount on your bill each month.
- Look at other options - Not all accounts are the same. They each offer different terms, interest rates, default rates, and late fees. Some offer temporary rates as low as 0%. Don’t sign up for the first card you are offered. Shop around and find the best deal.
It’s easy to fall into the trap of carrying a credit card balance for a lifetime. Many people do just that, but it isn’t smart. Take your time, do your research, and learn what you’re getting into. The more time you spend being careful now, the more money you’ll save down the road.
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