by Erin Doherty

Created on: October 13, 2009

The first thing most freshmen see when they move to college are the tables stacked with T-shirts and other freebies that come with applying for a credit card. Before you sign anything, take some time to think about what credit is and how you intend to use it.

Credit allows you to make purchases immediately, up to a predetermined dollar amount or credit limit, and pay for it over time. In exchange for paying the money up front, the bank backing the credit card will charge interest on your purchases if you do not pay the bill in full. This interest rate is the Annual Percentage Rate, or APR and the monthly application of this rate is the finance charge. Building a good credit history is important if you plan to buy a car, rent an apartment or make other large purchases. To build a positive credit history, never miss a payment and make at least the minimum payment every month. The minimum monthly payment will be a percentage, approximately 4%, of your total balance.

Some students will have enough money from a part-time job or other income source (parents) during the semester to cover their living expenses. If this applies to you and you can avoid splurging, you should be able to pay your credit card bill in full every month. In this case, the APR of your credit card does not matter and you can consider cards with higher APRs that also give you rewards, like airline miles, cash back, or shopping points. If the rewards card carries an annual fee, consider whether or not you will earn enough rewards to cover the fee.

Many students, however, will have cash flow issues that will prevent payment in full during the semester. The most common scenario involves using the credit card for living expenses throughout the academic year, then paying off the credit card with income from a full-time summer job. If you depend on financial aid for your living expenses, keep in mind that aid is only paid out once every semester. In this case, you will need to pay interest to the bank and you should shop around for a credit card with a low APR so that you will pay minimal finance charges.

Consider your situation before you apply for a card and remember that this money will have to be repaid eventually, with interest. If you think you will not be able to control your spending given a high credit limit, avoid getting a credit card. Credit is a tool, but it can be harmful if you abuse it. If you are able to use credit wisely, it will benefit you long after college is over.

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