AYSPS professor teaches the proper way to pay with plastic
The proper way to pay with plastic
By Michael Davis
August 21, 2008
ATLANTA — As students head back to fall classes this week, many may find themselves on the receiving end of several credit card offers. And while there are a number of things to look out for, Georgia State University Professor of Economics Paula Stephan says there are plenty of reasons to have a card, and use it wisely. Stephan conducts a seminar each fall called “Credit Card Craze” covering the ins and outs of paying with plastic.
Stephan: Well there are a whole lot of good reasons to get a credit card. First it’s a really fast and convenient way to pay for things, you don’t have to carry around a lot of cash, and that makes you a lot less vulnerable to losing your money or having it stolen, and it helps establish a credit history and demonstrates, particularly for students, that one has personal responsibility and some independence. And having a good credit history can be really helpful, not just in the future but right now. It could lower your car insurance rates, help you get better rates on cell phones, things like that.
But there are a few things students, and consumers in general, should think about when choosing a credit card, and using it. Is there an annual fee? How much? What’s the over-the-limit fee? And perhaps most importantly, what does the contract say about the annual percentage rate, or A.P.R.?
Stephan: And you also need to read on and find out what will trigger it to make it higher – for example if you miss a payment or miss two payments what is it going to be? And this could go up to 30, 33 percent. So it’s very, very important to look at what are called the penalty interest rates on it. And also, you need to learn what the interest rate’s going to be if you were to do something which I think is terrible, and that’s use it for a cash advance. It’s the last you’d want to do is use it for a cash advance. It carries very high interest rates.
So what should you pay for with your card once you have it? Card holders can run into trouble using credit for what some call lifestyle purchases. Stephan says that’s an easy way to run up big bills and dig a deep financial hole.
Stephan: Well, I think it’s really important to never charge for more than you can pay for. I mean, don’t think about charging for something that you have no ability to pay for for several years down the road. You want to be able to pay it off right away. And I think the most important thing for students is to think about charging smart. We like to say if you can eat it, drink it, wear it or entertain yourself with it, then it’s probably not worth charging. By the time the bill comes, you will have nothing left, except the debt, and it’s not a good way to start the month.
There are a few things cardholders can do if they find themselves in a bind. Communicating with your credit card issuer, Stephan says, should be the first step.
Stephan: The first thing I’d encourage you do to is either go see them in person or make a telephone call and make contact and ask, for example, you might ask to have your limit lowered so that you’re not as tempted to make charges that are hard to pay for. A lot of people find that the due date for their credit card is not a good match for when they themselves get paid. So why not call and ask them to change the due date so that you don’t have problems with a late-payment penalty?
So, to charge or not to charge? Fair Isaac, which computes credit scores and assesses risk for banks and other institutions, says consumers have, on average, 13 total credit obligations with nine of those being credit cards and the rest being installment loans like mortgages, car loans, student loans.
Stephan: Credit cards are very, very, very helpful and I encourage people to have them. But I also encourage them to never use more than one, and to really pay attention to their bills and to not carry a balance. Those are really important things.
