Using a credit card to pay for things is more common in many places than using cash. So it's important as teens become more independent to be able to get their own credit cards and handle them well.
It's not too hard for most college kids to get; the credit card companies inundate them with offers. What is hard is knowing how to resist the ease in which they can be used to their maximum credit limits, the ease in which multiple cards can be obtained, and the ease in which debt can mount up and overwhelm them.
How to Get a Credit Card
In deciding among various general credit cards, the choices aren't limited simply between MasterCard and VISA, or Discover or American Express. Your child can choose from different banks and other companies offering such cards. Before he signs on for any “free” card or applies for one on his own, though, make sure he gets the best deal.
Watch Your Step
Don't let your child send in any credit card application without reading the fine print. Check for annual fees, interest rates, grace periods, and cash advance terms. What may appear to be a good deal because of “no annual fee” may turn out to be a bad deal because of other terms.
The annual percentage rate (APR) is simply the interest rate charged for the full year. On credit card bills, this rate is broken down to a monthly rate of one-twelfth of the APR.
- Annual fees. Some cards are no- or low-fee cards; others charge a significant annual fee just for the privilege of holding the card. The fee doesn't change whether or not the card is used. In some cases, the fee is tied to the interest rates charged on outstanding balances. For example, some no-fee cards may charge a higher rate than a fee card. Why pay the fee when there's no need to? But your child shouldn't overlook a fee card that may prove to be a bargain in the long run if he uses the card and carries a monthly balance.
- Grace periods. Most credit cards give 25 days or so to pay the bill before any interest will be charged on purchases. But some cards don't advertise the fact that they charge interest from day one—there's no grace period. Look for the fine print that spells out the grace period before taking on the card.
- Interest rates. Rates are expressed in annual terms even though the bill comes monthly. A 12 percent annual rate means that your child is paying 1 percent each month. But some cards have an initially low rate as an incentive to get a person to take the cards and use them. The initial rate may be 6 percent a year, but this may be in effect for only the first six months you have the card. The rate may jump to 18 percent after the introductory rate expires, which means that in the long run the card is not as good a deal as one charging just 12 percent annually, year in and year out.
- Other items. While annual fees, introductory rates, and interest rates are the main features to check out, also look for any penalty interest rates (interest plus an additional amount) that may be imposed for violating the terms of the credit agreement (for example, exceeding the credit limit or failing to pay on time). Don't take on any card that uses a two-cycle average daily balance to figure interest rates (about 15 percent of credit cards do this), which results in higher interest charges. Also look for cash advance terms that may be unfavorable (for example, a higher interest rate on advances than the rate charged on purchases).
Teenagers may be flooded with offers from credit cards. Before accepting one, shop around to find the best deal possible. Check out Web sites that provide information on credit cards, such as these:
- Bankrate.com, an online publication, rates the best credit card deals, depending on the borrower's profile (for example, pays in full each month or is looking for the lowest interest rate)(www.bankrate.com/brm/ccard.asp).
- Credit Card Network, USA maintains a consumer information library with good links (www.creditnet.com).
- Credit Card Rate Guides compares more than 165 cards (asque.com/credcard.htm).
- CreditChoice provide information and a comparison of credit cards (www.creditchoice.com).
- National Institute for Consumer Education's Consumer Education Resources page provides information about credit cards and other consumer topics (www. eimch.edu/public/coe/nice.htm).
- United College Marketing Service is a VISA site with good information about credit cards, but remember that it's mainly there to push cards on college kids (www. college-visa.com).