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Students need lessons on credit cards

Aug 17: The credit card is fast becoming as much a staple of college life as backpacks and school books.

While the plastic may seem harmless enough (sometimes you just want the free T-shirt offered when you apply), a credit card is a serious financial undertaking, with terms that can lead to high penalty fees and interest rates if you don't use the card properly.

This year, the Federal Reserve, Congress and public advocacy groups have found that consumers often don't understand credit card rules and are paying the price with record amounts of household debt.

So if you're heading to campus this fall, it's important to learn credit basics before you sign up for a card (and there is ample opportunity to obtain a card: issuers solicit students through the mail, college bookstores, athletic events and on campus).

Here's what you need to know:

-- Don't rush in

If you're an incoming freshman, don't race to get a credit card, said Curtis Arnold, founder of, which tracks credit card offers.

Credit cards are a great way to begin building a credit history, which you will need after graduation to rent an apartment or borrow money. And students with no card experience rarely are approved for one after graduation.

But you may need a few months to become used to budgeting on your own.

"I usually don't recommend a card for the first year because there's so much adjustment to begin with," Arnold said. He warns against student credit cards, which tend to have lower credit limits--often about $500. "It's very easy if you max out one card to get another one," he said.

If a card is essential to, say, making flight reservations home or buying textbooks, you might think about opting for a debit card, which deducts cash from your checking account.

You may also want to consider a secured credit card, which requires you to deposit enough cash with the issuer to cover your credit limit--a safety net in case you are tempted to overspend.

A word of caution: Secured cards typically charge a host of fees, including so-called program and account-setup fees.

-- Seek out the best card

When you're ready for a credit card, don't fill out the first application you see, even if the card is promoted at the campus bookstore or a school event. Instead, seek out the best card for you. Save offers you receive in the mail and compare. Or search for deals online.

What should you be looking for?

One, a low interest rate, known as APR (for annual percentage rate). Though student credit cards typically carry higher rates than traditional cards, you should be able to find an APR of 18 percent or less. Two, you want a manageable credit limit. Consider what your cash flow can handle: Would you be able to repay $1,000 plus interest? If not, request a lower sum and make sure the issuer won't automatically raise the limit for you.

Three, don't shop based on rewards. Your first priority is to get used to paying your bill in full each month and on time. If you focus on accumulating rewards points you may be tempted to overspend.

-- Build good credit habits

A recent study found that college students often are unaware of what happens when payments are made late or only the minimum balance is mailed in.

In the first case, you will be penalized with high fees (often $30 or more) or higher interest rates--or both. And if you only pay the minimum due, interest starts to accrue and your balance can grow, especially if you continue to make charges.

Avoid these extra costs by remembering to pay your bill on the same date each month. And, as best you can, pay the full balance, not just the minimum payment.

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