Americans for Fairness in Lending

The Wall Street Journal

The immediate gratification of using plastic to buy an iMac, tickets to a Coldplay concert and nights of bar hopping has a way of coming back to haunt college students after graduation.

Despite their lack of a credit history and sizable student loans, most college students can get their hands on credit cards with as much ease as a swipe. And they're often lured into doing so with awards 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 one late payment can leave students with overwhelming debt and a damaged credit score -- which could hurt their chances of landing a job or an apartment after college.

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. 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:

Don't be lured in by free T-shirts.

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, such as a T-shirt or baseball cap featuring the school's logo. That's a huge mistake, as these credit cards may not serve a student's best interest. Some universities even receive money from credit-card companies for allowing them to pitch their cards on campus, says 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.

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 the more-established credit history (assuming they have good credit) -- and lower rates, says Mr. Ray. This is especially helpful to students who have a hard time controlling their finances.

Once a student signs onto their parents' account, the parents are 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, says Martha Doran, associate professor of accounting at San Diego State University.

Know your (credit) limits. With rare exceptions, all credit cards have limits. And because students lack established credit histories, they often receive fairly low ones -- typically 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 Mr. 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, say, less than half of the available credit, a student can maintain a solid credit score, says Steven Katz, director of consumer education at TrueCredit.com.

Remember, promotional rates 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 the APR will be afterward. (For most college students, the average APR is 15%, says Mr. Ray.)

Watch out for penalties and unnecessary fees.

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 Mr. Fox.

While many credit-card fees are unavoidable, others are entirely unnecessary. If a credit card carries an activation or annual-membership fee, pass on it, says Mr. Ray.

"These days few people pay annual fees," he says. "They've become a thing of the past."

Write to AnnaMaria Andriotis at editors@smsmallbiz.com