Beware: plastic money can lead to real trouble

I know I’ve recently been writing many columns on stocks and finance. You’re probably asking me, “How am I going to invest? I don’t have the money. And retirement is so far away.” All of these comments are true, and this is why I am going to discuss more relevant personal finance issues that specifically concern college-age students.

So, the first personal finance issue I am going to discuss is credit cards. After all, the reason why many of you are so strapped for cash is because you have a big credit card bill lingering over your head, with large finance charges or interest expenses accruing.

Personally, I think it’s a bad idea to get a credit card as a college student. While there are some positives to having a credit card, I believe the negatives outweigh them.

First, I think we should discuss the psychology that goes into having access to a credit card, and how it can get you into trouble. The psychology I am going to discuss may not be totally representative, but it probably has some applicability to students.

For example, whenever you go out, you know you have a decent line of credit you can spend. You begin making impulse purchases: a DVD here, a magazine there, an iPod accessory here. Nothing holds you back from making these purchases because you know that you won’t have to worry about paying them until the bill comes. And when the bill does come, you only have to make the minimum payment.

This is the type of mentality that can get you into serious problems.

When you start racking up significant balances, the credit card companies really make you pay.

First, there are finance charges – the interest you accrue on your balance each month. This is calculated using your APR (Annual Percentage Rate), which is the annual interest rate charged by the credit card company to lend money. And when you don’t pay off your credit card in full, you can really start racking up charges because compound interest can work against you, just like it works for you in investing.

For example, according to the credit card calculator, if you had a $1,000 balance and your minimum payment was 5 percent of the balance at an 18 percent APR, it would take you 70 months to pay it off, and you would wind up incurring $382.47 in interest!

Plus, there are late penalties if you miss a payment or go over your limit. The fees are very steep. Late penalties run around $35.

And if you become irresponsible or delinquent in your payments, it will hurt your credit.

Your credit score indicates your credit risk. Your score can range between 300 to 850. A score of 300 means you have a high credit risk while an 850 means you do not.

Your credit score is determined by a credit reporting agency using the credit history it has compiled on you. Three well-known credit reporting agencies are Equifax, Experian and TransUnion. For example, the FICO score, developed by the Fair Isaac Corporation, accounts for such factors as how often you make timely payments, the size of total debt you have and how long your credit history has been established.

Your credit score is extremely important because it is used when you are applying for loans and credit cards. The better score you have, the more likely you will get lower rates, and this can save you thousands of dollars on loans like mortgages. So, irresponsibility with a credit card not only means extra fees on the card but probably also higher rates on other loans.

Therefore, I’d like to give you the following advice about credit cards, if you already have one or decide to get one:

First, be careful how you use your credit card. Make sure you have the money to cover the monthly bill.

Second, make your payments promptly. Do not miss the payment due date because most credit card companies will tack on a late payment fee. If you do miss the payment date, make the payment immediately. Then, call the credit card company and ask if it will take the late fee off. They may take it off – especially if this is your first missed payment.

Third, pay off as much of the balance as possible. It’s better to take money out of savings to pay your bill because your bill is most likely at a higher interest rate than your savings account.

Fourth, check your credit score every year to make sure there are no errors concerning your payment history, lines of credit or total debt, as these factors can seriously impact your score. The Fair and Accurate Transactions Act (FACT), passed in 2003, allows people to apply for and receive a free credit report from Equifax, Experian and TransUnion each year. There’s no need to pay exorbitant fees to find out your score.

There are some benefits to getting a credit card. If you are responsible, you can start establishing credit early, which will help with your credit score. Credit cards are also helpful in emergencies or when you forget cash. They are also good for record-keeping.

Overall, I think it’s worth waiting to get a credit card if you know you are not going to be responsible or will have trouble making payments. After all, you are only going to ruin your credit score.

I think a check card, tied to your bank checking account, is a good alternative to a credit card. You have the convenience and record-keeping ability of a credit card but the safety in only spending what you have in your checking account. Plus, you also have access to the cash in your account via the ATM. There’s a danger in the check card of overdrawing your account, so you’ve got to be careful here, too. However, I think you are much less likely to get in trouble with a debit card.

Information from – (credit score, FICO, FACT information),, (APR information)