Student Credit Card Pitfalls:  9 Things to Know Before Taking the Free T-Shirt

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College students are use to seeing tables set up around campus pushing credit cards, especially at the beginning of the semester when credit card offers seem to hit you from all angles. A credit card or two can sometimes really come in handy and can also be a good way to build your credit (and get some cool swag at those tables). So, what’s the problem?

The problem is that almost half of all college students accumulate late fees on their cards and even more carry balances from month to month. This doesn’t help your finances or your credit score at all and you can face some long term effects after you graduate. With the semester kicking off, we at StudentPlatinum.com put together this article for our friends at FinancialAidNews.com to help you avoid nasty tricks and traps which can land you in hot water later.

Before you begin you might want to get an unbiased look at what cards you would probably get approved for with our Custom Credit Card Finder. You can then review the offers there as you read the following list and perhaps you'll find a gem and thus be able to stride right past the campus offers.

1. Minimum Payments

The bottom line in the credit card industry is that the issuers of plastic are in no hurry to see you pay off your debt. In fact, they make a lot more money if you make only the minimum monthly payment. And they're smart enough to know that if they ratchet down the minimum amount low enough -- say, to around 2.5% of the total balance, which is where it's been lately -- you'll keep charging, and they can make a fortune on you.

It's not in card issuers' interests for you to understand that if you borrow $10,000 on your credit cards and pay only the minimum payment with an interest rate of 19.98%, it will take you more than 37 years to get out of debt -- and before you do, you will have forked over nearly $19,000 in interest charges.

2. Zero Percent Interest Offers

Lots of card issuers now offer introductory rates of "zero percent" to customers willing to open new accounts and transfer their existing balances to them. These can be beneficial, but beware. Many of these zero-percent offers have very specific disclaimers -- in tiny print -- to the effect that if you're late paying by even one day, you forfeit your zero- or low-interest deal and your rate can be raised. We've seen deals where, if you're late just once, the rate jumps from zero to 24 percent. And if you're late twice, it jumps to 29 percent. Even worse, some of these special offers carry "retroactive interest-rate penalties," which means the cards' issuers can go back and charge you high rates for every balance you've ever carried, even when you were making your payments on time. You can use our Card Search to find and review all cards with zero percent interest offers.

3. Late Fees

Credit card companies are reaping more profit from late fees than ever before and college students are doing their part to contribute to this trend. Credit card companies are getting plump off late fees for a number of reasons, not the least of which are sharply increasing fees (which have more than doubled in the past 10 years) and that credit card companies are doing all they legally can to set you up to fail. Obviously you should pay on time but since not all companies charge the same late fees and supply the same interest rates, you should be selective and at least know what you’ll be charged.

Paying on time seems simple enough, right? Well, credit card companies have some tricks to foul you up. One way they do this is by decreasing the amount of time between when they mail a bill and when payment is due, in some cases you may have only a week or two to send in your payment before it’s late. To improve this trick, most companies have eliminated grace periods, the time after a payment's due date before a late fee is assessed. Even one day late can mean late fees and punitive APRs (see that section next). One way around this is to sign up for an online account with the company and ignore your statement but remember your payment date. That way you can log in and make your payment on time based upon your own schedule. You can use our Card Search to find and review all cards with low late fees.

4. Punitive Annual Percentage Rate (APR) Increases

If you miss a payment or spend over your limit, you are at the mercy of the credit card company and that usually means you will be introduced to a very profitable program for them, the Punitive Annual Percentage Rate.  This is a hefty increase in your normal APR which is usually more than eight percentage points higher. So, be sure to pay your bill on time and watch your limit.

Another way to experience the Punitive Annual Percentage Rate is to charge over your limit. Many companies assess this fee to cardholders who exceed their limits by as little as $1. You’d be surprised how easily this can happen to you. For example you could take advantage of a great balance transfer offer and not realize there is a hidden fee for balance transfers and then when your first interest charge hits, go over your limit. It’s best to always make sure you leave plenty of room for charges, fees and interest and read the next section on hidden transaction fees. You can use our Card Search to find and review all cards with no fee balance transfers.

5. Hidden Transaction Fees

Hidden fees are a common way credit card companies make extra money and you should understand what they are and if your card has them. With low interest offers on balance transfers, it’s a fairly common practice for credit card companies to actually charge you a hidden fee for performing the transfer. Sometimes cards have fees for cash advances and quasi-cash transactions, like the purchase of lottery tickets, which can significantly raise the cost of these transactions. The terms governing these transactions are buried in the fine print where students can easily miss them.

Minimum fees, also stated only in the fine print, allow credit card companies to guarantee themselves income regardless of the transaction amount. For example, if a card has a transaction fee of 3% and a minimum of $10, a cardholder who receives a $50 cash advance will be charged the minimum, $10, which amounts to an actual transaction fee of 20%. In general we don’t think you should have to pay a balance transfer fee on a new card; if your card asks you to do that, move on to the next one. You can use our student credit card search to find and review all cards with no hidden transaction fees.

6. Declining Grace Periods

Credit card companies are looking to make extra money with smaller grace periods (the time during which a transaction does not accrue interest). Grace periods were historically a full month long; they now average 23 days. Some cards have no grace periods at all. Make sure you look for a card with a grace period long enough to allow you to have a shot at paying off the card each month without costing you additional fees. You can use our Card Search to find and review all cards with longer than average grace periods.

7. Fixed APRs

Beware of “fixed” APRs. While they sound great, so-called "fixed" interest rates, despite their name, can be raised with as little as 15 days notice to cardholders. Also remember that a late payment or over the limit charge can “un-fix” your rate. You can use our Card Search to find and review all cards with or without fixed APRs.

8. Bait and Switch Credit Card Offers

Credit card offers generally advertise the premium card the bank has to offer, yet the fine print includes the caveat that the company can substitute a lower-grade, non-premium card if the applicant does not qualify for the premium card. The lower-grade card costs more and offers less attractive terms, facts which are rarely mentioned in the official disclosures of the offer. Before you apply for a prime credit card, try to ascertain your qualifications to avoid getting bumped to a lesser card. If you apply for a card and get one with unfavorable terms instead, don’t hesitate to cancel that card. If you want to see cards which you're likely to get approved for, you can use our Custom Credit Card Finder.

9. Interest Method Calculation Matters

The new holder of the crown for lousy credit card deals is any credit card which bears the term "two cycle average daily balance”. The standard “average daily balance” computation calculates interest based upon the balance of the current billing cycle. That means that you could potentially make your payment in small chunks over one month and end up paying less interest than if you paid it all at once. This is a good thing, as it helps you reduce your debt faster.
Two-cycle average daily balance is the credit card's solution to this problem. How it works is simple: instead of computing your average daily balance for the current billing cycle, it computes the average daily balance for the current and previous billing cycles. This means that even though your balance is lower this month than last, they will still charge you interest on the money you already paid back! Obviously, steer clear of these cards! You can use our Card Search to find and review all cards which don't use the two cycle average daily balance method.

Conclusion

When getting a credit card you should always remember that the main goal of the card issuer is to make money on you in as many ways as possible. Issuers of plastic don't really mind when you're late making a payment because there's big money in collecting late fees. Therefore, you should always follow these three rules:

1. Read the fine print and understand what it means!
2. Shop around for a better deal; college students are attractive candidates for credit card companies and so you should be selective.
3. Know your limitations and add credit card payments to your monthly budget so you know what you can afford to charge.

For more credit card education, student credit card descriptions or to use our Customized Credit Card finder, please visit www.studentplatinum.com.