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This column continues tips for college students on
handling credit.
Credit card companies aggressively target college students
because they expect to have their business for years after
graduation. Students who use credit cards can build a credit
history and have a source of money for emergencies. At the
same time, credit cards are very seductive and, before they
know it, students reach their credit limits without a source
of income to pay off their debt.
Students will get maximum benefits from credit
cards by using them carefully. Ignore ads for credit cards
that lure Consumers with low interest rates that will expire
in six months or so. If a student does choose one of these
cards, she should read the small print to determine what the
interest rate will actually be after the introductory time
period is up.
When one is in need, cash advance purchases look
like a friend, but they can be quite costly. In fact, this
can be one of the most expensive types of loans. Interest is
charged from the date of the cash advance (most of the time,
there is no grace period) and a special cash advance fee
also is added to the bill.
Let's say a Consumer takes out a cash advance of
$300 and is charged the average fee of $2.50. At the same
time she'll be paying interest (about 18.5 percent,
depending upon the card issuer). If the cardholder pays the
advance back in full 25 days after taking out the advance,
she will have paid an effective interest rate of 32.94
percent for the advance. Legal? Yes. Smart? No.
Most cards offer an interest-free period for 25-30
days, if the card carries no outstanding balance, although
this time period seems to be growing shorter. Credit card
companies mail the bills later and still expect payment by
the due date. If a customer forgets to mail a check on time
or carries over ANY balance - even a dollar - he forfeits
the grace period and pays interest on all new purchases.
Alert college students to the fact that credit card
issuers love folks who pay only the minimum payment,
typically only 2.5 percent of the balance. If your son maxes
his card at $500 and makes only the minimum payment, with an
18 percent interest rate, it will take him seven years to
pay off the balance and he will have paid $365 in interest -
almost as much as the $500 credit.
More next week.
For more information, contact your local
Colorado State University Extension office.
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