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Credit and Debit Cards

Are You Ready for a Credit Card?

As a student, you will have to decide for yourself whether you can handle the responsibility of a credit card. They are easy to get but not so easy to manage, especially if you end up with a high, unpaid balance on which interest is accruing, but payments are not being made.

When making your decision about a credit card, ask yourself:

  • Do I need a credit card?
  • Can I afford a credit card?
  • Will I be able to pay off my balance each month?

If you decide to apply for a credit card, be a smart consumer and shop around. Visit resources like bankrate.com for guidance on evaluating credit card offers. Look for a company that offers the following:

  • A low fixed-interest rate, finance charges, or Annual Percentage Rate (APR)
  • No annual fees
  • A grace period (time during which no payments are due) before finance charges are posted
  • Other benefits, including purchase warranties, free gas, airline miles, etc.


How Credit Cards are Billed

Unlike repayment on a traditional loan, such as a student or car loan, credit cards do not allow you to spread the amount you owe over a fixed period of time. Instead, you are required to make a minimum monthly payment, which is the smallest amount you can pay and still meet your cardholder agreement (the terms you agree to meet when signing up for the card). The minimum payment is usually 2–3% of your outstanding balance. As your credit balance increases or decreases, so does the minimum amount you are required to pay monthly.


Sample Credit Card Repayment

Principal
Loan Amount
Borrowed
Interest Rate Monthly
Payment
Number
of Monthly
Payments
Total
Amount
Repaid
$5,000
19%
35 of balance
(initially, $150)
238 (20 years)
$10,360


Don't Take Cash Advances

Use your bank debit card (see next section) if you need cash, not your credit card. The interest rate on your credit card is usually 2–3% higher for cash advances than for purchases. Cash advances don't get paid in full possibly until the balance of the credit card is paid off.


Debit Cards

Another type of "plastic" that resembles a credit card is a debit card. Banks generally issue debit cards, also known as ATM (automatic teller machine) cards, when you open up a checking or savings account. (Many colleges also have a type of debit card that allows students to make campus purchases from a central student account.) A debit/ATM card gives you 24-hour electronic access to your bank account for making deposits, withdrawing cash, and making purchases. When you use this card for a withdrawal or purchase, funds are taken out of your account immediately.

Like credit cards, debit/ATM cards are very convenient and, increasingly, students use them for purchases in place of writing checks. An important point to remember about using debit cards, however, is that you must have enough money in your account to cover your withdrawal or purchase. Also, you need to track your ATM transactions carefully, just like keeping track of the checks you write, in your account ledger or bank book.

Using a debit card can be a good alternative to using a credit card, because you access your own money instead of borrowing from the credit card issuer. However, debit cards still require disciplined use and careful tracking. Sometimes you can overdraw your account. Be careful of overdraft fees.


A Note About APRs

The annual percentage rate (APR) represents the rate of interest charged on credit card purchases, plus fees, expressed as a yearly rate. Federal law (under the Truth in Lending Act) requires credit card issuers to disclose their APRs as a way for consumers to compare the terms of different credit cards by using this common index.