Student Credit Card and Credit Education Blog

A recent student credit card survey our friends at www.ScholarshipPoints.com conducted showed that 85% of the students surveyed ranked APR as the most important factor when evaluating a credit card offer. Ask most people that same question and we bet you’d get the same answer. We think that people pay too much attention to APR without really understanding what it is.

APR or Annual Percentage Rate (the amount of interest charged per year on a loan or credit card balance) is a number that is legally required to be stated but that is not really indicative of what you actually pay.

The first reason students pay too much attention to APR is that APR only comes into play when you carry a balance from month to month in your credit cards. This means if you pay off your credit card charges within one billing period you don’t have to pay interest at all. Students worry excessively about a card’s APR and fail to understand the benefits.

We always recommend paying off your balance monthly and charging only what you can pay back. If you do this the most important factor for you is not APR but rather what are the card benefits. Here’s what I mean; I spend $300 on grocery items per month. I pay cash for them every month because I have that number budgeted. If I have a credit card that pays me back 5% cash on groceries with a 20% APR I know I can use that to buy my $300 worth of groceries and that paying it off without incurring interest is no problem. However, I also get $15 cash back which buys me a free pizza or two on the weekends. It goes the same with gas or any other reward.

Now if you do carry a balance its important to know what APR really is. APR is your interest rate but there is a difference between your interest rate and your interest charge. In simple terms, the rate is the percentage of your balance that your interest charge will be based on. The interest charge is the actual number of dollars that you pay for interest, based on your interest rate.

To make this easier to understand let’s look at the math. Strictly based upon APR if you owed $1,000 for one year at a 19% APR you would pay $190 in total divided over 12 months. Since your balance will fluctuate every month however this perfect scenario doesn’t exist. So the real question becomes, how does the credit card company calculate what balance to charge you interest on each month?

The method of interest calculation is where you can get socked if you don’t pay attention and so this is an equally if not more significant question to ask when evaluating a credit card if you plan on carrying a balance.

Credit card interest is calculated on one of three basic ways:

• Average Daily Balance. This is the most common calculation method. To figure the balance due, the credit card company totals the beginning balance for each day in the billing period and subtracts any credits made to your account that day. The resulting daily balances are added for the billing cycle. Then, the total is divided by the number of days in the billing period to get the “average daily balance.” (Tip: making frequent payments whenever you can during the month will decrease the daily balances calculated at the end of the month and save you interest charges!)
• Adjusted Balance. This usually is the most advantageous method for you. The credit card company determines your balance by subtracting payments or credits received during the current billing period from the balance at the end of the previous billing period. Purchases made during the billing period aren’t included. This method gives you until the end of the billing period to pay a portion of your balance to avoid the interest charges on that amount.
• Previous Balance. This is the amount you owed at the end of the previous billing period. Payments, credits, and purchases made during the current billing period are not included.
  
• Two-cycle or Double-cycle Balances. Issuers sometimes calculate your balance using your last two month’s account activity. This approach eliminates the interest-free period if you go from paying your balance in full each month to paying only a portion each month of what you owe. We really don’t like this method and you should try to avoid it if possible.

From answering your questions via email and in the forums it’s clear that many students do not understand much about APR except big is bad but they are missing the point for sure. Credit card companies rely on all the people who don’t pay off their charges. Responsible credit card use entails charging only what you can pay back in a month or two. If you do that APR is far less important than what your credit card can do for you!

Here are some great student rewards credit cards to consider:

The Citi® mtvU Visa Credit Credit Card for Students: I really like this card. With no annual fee, it has benefits similar to a regular platinum card such as purchase protection but best of all it rewards students for maintaining a high GPA and making payments on time. It does require that students have good credit however. Apply Now.

The Discover® Open Road Credit Card for Students: This card is close second. It offers a superb cash reward program where students earn a full 5% in cash rebates for gas and auto maintenance purchases. For students on a budget this can add up with gas prices out of control. This card is good for students with a very limited credit history. Apply Now.

The Citi® Dividend Platinum Select® Visa Credit Card for College Students: It’s an ideal card if students want to earn cash back on all purchases. They earn a 5% rebate on purchases at supermarkets, drugstores, gas stations, convenience stores, and utilities. Best of all this card accepts students with no credit history. Apply Now.

ScholarshipPoints members looking for their blog candy will find APRISDUMB quite a tasty snack. Go to www.ScholarshipPoints.com and enter that code for 20 points! Also be sure to enter those points in the October $10,000 scholarship drawing!