The college student's guide to credit cards

Credit cards have become increasingly popular over the past several decades, especially among college students. Although credit can provide numerous benefits, it's important to understand the risk involved with owning credit cards. This three-part series will try to answer everything you ever wanted to know about credit cards. It will cover several aspects of credit cards for college students including general information about credit cards, the pros and cons of using plastic, how to evaluate credit card offers, how to use credit responsibly, and alternatives to credit cards. The Realities of Student Credit Cards- What You Should Know:

A 2008 study by Sallie Mae revealed that 84 percent of undergraduates own at least one credit card, and over 50 percent of all college students own four or more credit cards. In addition, the average number of cards has grown to 4.6 per undergraduate student.

Along with a growing number of credit cards, the study showed that outstanding credit card balances are also increasing. Information showed that students have:

Record-high credit card balances: The average balance grew to $3173, and 21 percent of undergraduates carried balances between $3000 and $7000 (up from the last study in 2004). In addition, the average college senior will graduate with $4100 in credit card debt.

Fewer students with zero balance: The percentage of students with a zero credit balance dropped dramatically from 69 percent in 2004 to only 15 percent in 2008.

More students charging educational expenses: Since 2004, the percentage of students who charge expenses such as textbooks and school supplies rose from 85 percent to 92 percent in 2008. In addition, 30 percent of students in the study stated that they pay their tuition with a credit card (which is now worse than ever because colleges are charging service fees for paying tuition with a credit card - up to 3 percent!).

Students surprised at high balances: The majority of students (60 percent) stated that they were surprised by their card balances, while 40 percent of students claimed to knowingly charge items they did not have the money to pay for.

Most students carry a balance: Alarmingly, only 17 percent of students said that they paid off credit card balances regularly each month. This means that 83 percent of students with credit card balances are paying interest on their charges each month.

So what does all this mean? It means that credit cards need to be treated with respect. While they offer convenience and security, they can also create significant financial difficulties.

The Pros and Cons of Student Credit Cards:

The first and most important thing to think about when using a credit card is - Will you be able to pay off the full balance of your credit card each month? If the answer is yes, credit cards can provide a host of opportunities for building your credit score, gaining rewards points, and protecting your identity. If the answer is no, credit cards can lead you down a horrible path of 25 percent interest, a drop in your credit score, and years of debt repayment.

Here are some pros and cons of credit cards in more detail:

Pros-

Emergencies: Sometimes, things happen that we just can't plan for. An unexpected assigned textbook or a sudden need to fly home for a family emergency are both examples of how credit cards can be used to help with emergency situations where cash will simply not suffice.

Security: Identity theft is a huge risk, and credit cards can help deter this risk when used properly. Credit cards provide limited liability for users because many companies will cover fraudulent charges. In addition, carrying cash poses a greater risk because it can be easily lost or stolen.

Card Rewards: Most credit cards come with some sort of bonus reward program. Whether it's cash back, points, or frequent flyer miles, these programs provide great incentives for using the card responsibly. Choose the rewards program that fits you best.

Building Credit: Getting credit cards early in your life can help build your credit score for the future. The longer you have had credit and used it responsibly, the higher your credit score will be (and the easier it will be to obtain loans for things like your future car and house). Credit cards are one of the easiest ways to build credit.

Cons

Interest Charges: Credit cards are notorious for high interest rates on outstanding balances (some as high as 30 percent!). This is a huge risk for college students who do not pay their bills in full each month. Carrying a balance costs a lot more in the long run than paying off charges each month. For example, a student with a credit card balance of $7000 with an interest rate of 18.9 percent could make minimum monthly payments for 16 years before paying off the balance in full. The principal plus interest would equal $14,173, over twice the amount of the initial card balance.

Overspending: History has shown that people generally spend more money when armed with a credit card rather than cash. Students are especially at risk because they generally do not have the income to pay for frivolous spending on credit cards. Credit cards should not be used in lieu of another source of income, and should be spent wisely.

Bad Credit History: Paying off your full balance each month on time will help build your credit just like failing to pay your bill each month will result in poor credit. Credit cards will backfire on you if you cannot pay because they will ultimately reflect poorly on your credit history, making it more difficult for you to get loans in the future.

Cosigners: Especially for college freshmen, some credit card companies will make a responsible party cosign for the credit card debt. This could cause a strain on relationships if you fail to make your payments because this behavior will then reflect badly on your cosigner's credit history.