If you have some loved ones heading to college soon, take some time to warn them about the dangers of credit card debt. Here's what we'd tell them:
College can be great. No parents nagging you with curfews. You can eat ice cream for breakfast and popcorn for dinner. And, best of all, America's banks keep offering you credit cards!
Fast-forward to your graduation. You've racked up $5,000 in debt on your card. Are you worried? Naaaah. Your minimum monthly payment is only 2% -- just $100 per month. Consider a few things, though. When you signed up for the card, it offered that low 6.9% interest rate. But, you did notice, didn't you, that the rate swelled to 18% after six months? Sneaky devils, those card companies...
Now, even if you don't accumulate any more debt, it can take you almost eight years to pay off the balance if you just make minimum payments. Holy guacamole! All told, you will have paid nearly double the amount back: $4,311 in interest, plus the $5,000 you borrowed. No wonder the banks keep sending you unsolicited credit card applications.
Here's another danger. Let's say you inherit $5,000 from your Great Aunt Bertha, and you're fired up to invest that five grand in stocks. However, you still owe that $5,000, paying 18% annual interest. If your $5,000 stock investment nets you an 11% return, you're still losing money -- 11% in, 18% out. Investing doesn't work well if you're deep in debt at high interest rates.
Don't worry, though. We're not going to tell you to use credit cards only as shoehorns, eye patches, and after-dinner snacks. It's OK to have a credit card. Just make sure that you're only charging what you can afford to pay, and that you pay the bills off in full each month. Choose your cards carefully, using an electron microscope to read the fine print. Look for a low interest rate, no annual fee, no unreasonable penalties, and a protected, interest-free grace period. Then, when the bill arrives, take five minutes and scrutinize your statement for mysterious charges.
Finally, if you find it difficult to manage a revolving-debt card, consider getting the type of charge card that requires full payment each month -- like an old-fashioned American Express card.
The typical American household owes thousands of dollars on credit cards. Be above average, Fool. Graduate without credit card debt.
Learn more in our Credit Center, which features a "Get Out of Debt" section. If you've got your personal finances under control and would like to make the most of money you'll be needing in the next few years, visit our Savings Center, where we offer some special deals on interest rates.