According to the credit-scoring company FICO, 67 percent of 18 to 24-year-olds have at least one credit card at their disposal. Few, though, have learned how these accounts work and the best way to handle them. Without that education, overwhelming debt and a bad credit rating can soon follow.
Thankfully, a successful relationship with credit cards can be achieved with just a few easy lessons!
Lesson 1: The issuer’s role
Banks (like Citi, Wells Fargo and Chase), credit unions and credit card companies (like Discover and American Express) issue credit cards to qualified applicants. Each card is assigned a credit line — the preset sum a cardholder may borrow.
At the end of the billing cycle (about 30 days), the issuer sends the account owner a statement outlining all transactions, the total balance, minimum amount due and the payment due date.
The account remains in good standing as long as the issuer receives at least the minimum amount due by the payment due date. If less than the full balance is sent, the remainder carries over to the next month’s statement.
Lesson 2: The price to pay in installments
Paying the entire balance by the due date is ideal, but there are times when paying just a portion makes sense. Maybe your student needs a new laptop costing $1,000 but doesn’t have the cash. Charging it and paying over time can be fine but interest will be added to the revolving balance. The higher the interest rate (the annual percentage rate, or APR) and the lower the monthly payments, the more money and time it will cost for your student to pay off the laptop.
This illustrates why the best way to repay a credit card debt is by making substantial and steady monthly payments:
|If your student makes the minimum payment|
|$1,000 charge||17% APR||29% APR|
|Minimum payment||$30 to start, tapering to $25||$30 to start, tapering to $25|
|Total interest cost||$451||$1,571|
|Pay off time||57 months/4.75 years||100/8.33 years|
|If your student makes a fixed payment|
|$1,000 charge||17% APR||17% APR||29% APR||29% APR|
|Total interest cost||$86||$32||$158||$56|
|Pay off time||11 months||4 months||12 months||4 months|
Lesson 3: Additional fees
There are other costs associated with credit cards. The first is an annual fee, which is the amount an issuer may charge your student to keep a credit card active. Not all accounts have them, but for those that do, the current range is anywhere from $32 on up to hundreds.
Other fees may be tacked on as penalties. If your student exceeds the credit limit, the issuer may add $25 or more to the balance. Pay late and it’ll cost another $25 or so.
Your student can avoid punitive fees by paying attention to due dates and balances. In addition, the over limit fee will not apply if your student doesn’t “opt in” to charge more than the credit line.
Lesson 4: Your student’s credit report card
Each month the credit card issuer will send your student’s account activity to the three credit reporting agencies: TransUnion, Equifax and Experian. These companies create consumer credit reports that house data including the date the account was opened, the average daily and ending balance, and payment pattern. Your student can access these reports for free once a year from AnnualCreditReport.com.
Anyone with a legitimate business purpose can pull reports, too. Landlords and employers will usually want to see a recent copy. Lenders will check, but typically make decisions based on credit scores, which are a numerical expression of a person’s creditworthiness.
Lesson 5: Your student’s credit “GPA”
FICO and VantageScore are the two major credit-scoring companies in the U.S. They use the same 300 to 850 scale, with higher numbers indicating less lending risk (i.e., a better score).
To develop a high score, your student should:
- Always pay by the due date
- Keep debt at zero or very low compared to the credit line
- Charge often and over a long period of time
- Apply only for necessary credit products and eventually have multiple loans and credit cards
Simple? Yes, but it requires willpower as you probably know from your own experiences. Your student must continually resist the temptation to use the card to buy non-essentials.
Lesson 6: Choosing the right card
Student credit cards are developed specifically for people enrolled in college and come in two varieties:
- Secured. Money is put down as collateral, and the credit line usually matches that sum. If the student defaults on the account, the issuer can claim what is owed from the funds held in deposit. These cards are easy to qualify for because lending risk is greatly reduced by the security deposit.
- Unsecured. No money is put down as collateral, so unsecured student cards tend to have higher qualification standards. However, if the student has a reliable income source, the issuer may grant an account with a low credit limit.
Another way for your student to obtain a first credit card is to make them an authorized user on your account. That card will show up on all cardholders’ credit reports, but only the owner will be liable for the payments.
Lesson 7: How to apply
Have your student review credit card offers that seem suitable, then prepare to apply.
Per federal law, anyone under the age of 21 must complete a written application (either online or by submitting a hard copy in person or by mail) and prove financial capability. The application will have a field for income source and amount, and the issuer may verify this information. If you provide economic support, your student may include it, as well as funds from scholarships and grants. Student loans, though, are not considered.
Lesson 8: How to manage the account
Once the credit card is granted, your student should keep the card safe and monitor their account carefully and often. It’s smart to review activity every few days, either online or via the issuer’s app. Your student will see a running total of their charges and can scale back spending before the balance grows too high.
This is also a good way to be sure they catch and address mistakes and fraud early. As you also know, perhaps too well, learning to communicate with a credit card issuer’s customer service representative is an essential life skill.