10/ 24/ 2007
During the first few weeks of your college classes, you probably noticed tables set up outside of the bookstore, campus eateries and perhaps even the library. They offered free T-shirts, pizza coupons and maybe something really exciting, such as giveaways for free phones or MP3 players. The catch? In order to get these freebies, you had to sign up for a credit card.
For most college students, credit cards have become as much a part of life as midterm cramming and late-night pizzas. Businessweek.com reports that 75 percent of college students have credit cards, which is up from the 1998 rate of 67 percent, proving that the plastic is becoming more ubiquitous with each passing decade.
While responsible credit-card use can build your credit rating, many college students rack up debt on their cards that will be with them long after they graduate. As a young entrepreneur, it's especially important that you use credit cards wisely because your ability to receive business loans and inventory may depend on a good credit history. The following tips will help you use your plastic wisely.
It's never free
At those campus tables, the representatives encouraging you to sign up for a credit card probably stressed the fact that it was free to apply. And once the card arrives, many students (and older people, too) will treat the card like a gift, using it to purchase things they never would have bought if they had to count out the cash and hand it over. But rest assured, everything you put on the card will arrive in a bill at the end of the month, and if you don't pay the balance in full, it will accumulate interest and lead to an even bigger bill the next month. If you don't think you can resist the temptation of overcharging, then hold off on getting a card.
Research various card options
If you decide a credit card is a necessity, don't sign up for one based on which giveaway T-shirt you like best. Likely the cards featured in those special giveaways don't offer the best interest rates. Think about it: Credit-card companies make money off of people who accrue interest on their cards, so the higher the interest rate, the higher the profit. Because many college students are willing to sign up without asking the details, it makes sense that companies try to slip higher rates by them.
So compare interest rates, called annual percentage rates (APR), on various cards. Some cards have special introductory offers of low or even zero APR, but find out what the rate is after the special offer expires. Also, see if the cards charge you an annual fee and skip the ones that do.
Keep it to one card
Another problem that people run into with credit cards is simply having too many of them. The best method to make credit cards compatible with your budget is to set aside an amount you can comfortably charge each month, then keep track of your spending. Having only one card makes this process much easier. Also, if you set up your account so that you pay your bill online, you can log in and check your balance throughout the month. Not only is this much easier than tallying receipts, it also prevents you from experiencing the shock of a bigger-than-expected bill at the end of the month.
One other reason to have only one card: Let's say you have two cards and fall behind on one payment. Thanks to something called universal default, your interest rate can be raised on all of your cards, not just the one on which you've fallen behind. True, as your business grows, you may have to differentiate your personal and business credit cards for accounting purposes, but in that case, limit yourself to one for each and no more.
Never pay only the minimum balance
If cash is tight a certain month, it may be tempting to pay the minimum balance on your card and hope that you'll be able to make it up the next month. The only problem with this line of thought is that by the next month the balance, plus interest, plus new purchases are going to make for an even bigger bill. Thus, your debt will grow, and your plan to pay everything off will not be so easy to execute. Do your best to pay your balance in full every month. If that isn't possible, at least find other places in your budget to cut down so that you can put some extra money towards your credit-card bill.
While credit cards are a way of life for most Americans (especially entrepreneurs), the debt that often comes with them doesn't have to be. If you're smart about credit-card use from the first time you sign up for one, you'll already be ahead of the game.
