It’s a familiar story, and one in which you might have played the lead character: College student falls in love, and then falls into debt. That is, the credit card was all shiny and new, and you could buy all these great things with it. You loved it, until the collection calls and those sharply worded letters started coming. You soon came to rue the day you signed up for that credit card.
If that sounds familiar, it may be because it happened to a lot of college students, particularly during the 1980s, 1990s and early 2000s. Credit card companies marketed the heck out of their plastic products to students, often unwitting freshmen who were often unprepared for the responsibilities that came with being a full-time student and a part-time or no-time employee and paying with plastic.
The Credit Card Act of 2009 changed a lot of that. Now those under 21 can’t get a credit card unless they have a willing co-signer, like a parent, or can prove their ability to make payments with their own income. (So if you have a college kid who is under 21 and wants a credit card, you may be able to delay this milestone a little longer.) Still, while the 2009 law improved things, college kids can still get in trouble. For instance, your 19-year-old could apply for a credit card while working over the summer, and then leave the job in the fall to focus on school -– but still possess the credit card.
But never mind. Your college kid is going to pick out a credit card, and this time things will be different. History is not going to repeat itself, unless your college kid is taking a history class and has to repeat it. Your college kid is going to get a good credit card, preferably one designed for college students. But whatever card he or she gets, you’ll want to make sure they avoid — or at least be wary of — the following features.
1. Annual Fees
Some credit cards charge annual fees, often $100 or more. These credit cards probably offer rewards, like cash back every time you spend money on gas, groceries and hotels, and the annual fee is justified by the credit card companies because it offsets all the money the cardholder will save. Now, that rewards credit card may be fine for some college kids who live in apartments, drive a car regularly and go on beach vacations for spring break. But if your student isn’t much of a high roller, does he or she really need a rewards card that comes with a fee? Generally, to pay off these annual fees, you have to spend pretty heavily and pay off the credit card in full every month. Maybe you should get the credit card with the annual fee, but your kid?
“As a student, the last thing you want to be thinking about is how to spend money you don’t have just to justify the annual fee,” said Nathan Grant of Credit Card Insider.
If your kid doesn’t use the credit card all that much, he or she may not get into financial trouble, but the annual fee is money wasted. Keep in mind there are some student rewards credit cards that don’t have an annual fee, so if you really want your kid to have a rewards card, look for those.
2. High Credit Limits
But, wait, that’s a good thing, right? We all want high available credit limits, and it shows that the credit card company trusts your kid.
True, but your credit card company has never met your kid. You have. Can you trust her or him not to max it out? And if your kid gets in over his head, the credit card company won’t be bailing him out. But you might.
“Apply for a card with a lower credit limit,” Grant advised, adding that your college kid will have less temptation to make large purchases that they can’t pay in full. “Balances that aren’t fully paid by the due date will carry over and accumulate interest, making payments even tougher to manage,” he said.
3. Deferred Interest
This, as you probably know, is when you have a period of six to 18 months in which you may be able to make purchases and not be charged any interest. And, of course, that sounds like the best thing ever. Why wouldn’t you want your college kid to get a credit card like that? And we just spent the last paragraph talking about how bad it would be to accumulate interest!
If that’s your thinking, and you’re getting psyched about getting a credit card with deferred interest, you’re making the case for not getting the card. That’s because deferred interest is often a trap, said Daniel Gillaspia, founder of the credit card rewards blog UponArriving.com.
“Many people fall for deferred interest and end up paying a large amount in interest in the end, and often because they didn’t even realize how deferred interest worked in the first place,” he said.
Look, yes, the good news is that your college kid can buy whatever he or she wants for a specific time period, interest free. That’s great, and that’s why credit cards use it as a marketing tool.
But what if your kid doesn’t pay it all back within that time period? That interest your kid wasn’t worry about has been accruing all of this time, Gillaspia explains, adding: “You’ll have to pay back all of that interest.”
Well, your kid will have to pay it back — or you might, if you co-signed or don’t have the heart to see your child still in college and deep in debt, before she gets out of college and is deep in debt from student loans.
And keep in mind, you want your college kid to develop good, smart credit card habits. Credit cards with deferred interest can be very useful if you’re going to make a major purchase ― say, a convection oven ― and you want to pay it off over a few months without accruing interest. But your college kid probably isn’t buying a convection oven any time soon, is he? Starting out with a new credit card and getting into the habit of not worrying about paying off the card in full every month seems like a very bad idea.
4. Credit Cards With The College Logo On It
It isn’t that you should avoid these cards, but you want to be wary of them and not assume that it’s the best card for your kid.
“Most colleges and universities offer credit cards to students with the school’s name and logo and maybe a pretty campus picture, but that doesn’t mean the card is the best choice,” said Adam Jusko, who runs two personal finance websites, ProudMoney.com and CreditCardCatalog.com.
But it’s a good choice, right? After all, the college aligned itself with this company.
“Schools have contracts with credit card issuers to allow the use of their names and logos for a fee, but the school does not set the terms of the cards and really only sees them as a source of revenue,” Jusko said. “These cards may be OK, but you should still shop around instead of jumping on the offer because it would be cool to have a card with your school’s mascot on the front.”
5. High Interest Rates
You could make the argument that if the credit card your college kid is interested in is wonderful in every other way, that a high interest rate, like 26.9 percent or 29.99 percent or higher, doesn’t matter. After all, your college kid is going to pay off the card every month, no matter what, right? There is absolutely no chance of your kid ever falling behind and going into revolving debt and seeing his credit score plummet, right?
Yeah, that’s what we thought … see if you can find a good credit card with a low interest rate.