A Crash Course in Credit Cards for College Students

The immediate gratification of putting an iMac, tickets to a Coldplay concert, and nights of bar hopping on plastic tends to have a bad habit of coming back to haunt college students post-graduation.

Despite a lack of credit history and sizable sums in student loans, most college students can get their hands on plastic with as much ease as a card swipe. And they're often lured into doing so with prizes like free T-shirts. Along with the freebies, however, come some not-so-pleasant surprises: high interest rates and a range of fees and penalties. One reckless night of spending or late payment can leave students with overwhelming debt and a damaged credit score — factors that could hurt their chances of landing a job or an apartment post-graduation.

Unfortunately, many graduates know this all too well. More than three-quarters of undergraduates hold credit cards, according to student-loan provider Nellie Mae. Their average debt load: $2,169. However, that amount is nothing compared to the 10% of students who graduate with more than $10,000 in credit-card debt, according to a 2008 survey commissioned by credit bureau TransUnion's credit management web site TrueCredit.com and conducted by market research company Zogby International.

"[College students] don't realize that anything they do now will stay on their credit report for the next seven to 10 years," says Thomas Fox, community outreach director at Cambridge Credit Counseling Corporation, a debt-management agency.

To graduate with honors in credit-card management, here's what students need to know.

TrueCredit.com's survey found that four out of 10 consumers sign up for a credit card to receive a free gift or special offer. That's a huge mistake. Even though the school's logo may be on the free T-shirt or baseball cap, these credit cards may not serve in a student's best interest, says Fox. In fact, some universities even receive money from credit-card companies in exchange for allowing them to pitch their cards on campus, warns Daniel Ray, editor in chief of CreditCards.com.

Make sure to compare a credit card's terms to other offers by going to web sites like CreditCards.com and LowerMyBills.com.

Here's a sampling of some of the better deals currently available to students:

Piggyback on a Parent's Card

Another option is to accept (yet another) helping hand from mom and dad.

Signing onto a parent's credit card allows a student to take advantage of their parent's more established credit history (assuming the parents have good credit) — and their lower rates, says Ray. This tactic is especially helpful to students who have a hard time controlling their finances. Once a student signs onto their parent's account, the parent is held responsible for their purchases and payments and will also be able to monitor their spending habits, hopefully preventing them from racking up sizable debt, explains Martha Doran, associate professor of accounting at San Diego State University.

Know Your (Credit) Limits

With extremely rare exception, all credit cards have limits. And because students lack established credit histories, they often receive fairly low ones — typically of no more than $3,000, says Tom Dailey, a credit-card industry consultant and former senior vice president at Discover. (Limits are often as low as $500 or $1,000 per credit card, says Ray.)

It goes without saying that exceeding a card's limit can carry dire consequences, but there's also a way to make those limits work in one's favor. By carrying a balance of less than half of the available credit, for example, a student can maintain a solid credit score, says Steven Katz, director of consumer education at TrueCredit.com.

Remember, Promotional APRs Are Temporary

That 0% introductory rate is about as tempting as they come, but that temptation won't last.

Introductory annual percentage rates, or APRs, expire, and when they do they give way to high rates, especially for college students. So make sure to find out how long the introductory rate lasts and what its APR will be afterwards. (For most college students, the average APR is 15%, says Ray.)

No matter how boring it may be, read the fine print of your credit-card agreement.

That way, if you make a late payment, it should come as no surprise when you're hit with a late fee or when the interest rate skyrockets. Another thing to look out for: "universal default," a clause that allows a creditor to penalize a cardholder for making a late payment on another lender's card, says Fox.

While many credit-card fees are unavoidable, others are entirely unnecessary. If a credit card carries an activation fee or an annual membership fee, pass on it, says Ray. "These days few people pay annual fees," he says. "They've become a thing of the past."