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Avoid Credit Card Hell


Playing fast and loose with plastic is a recipe for financial disaster.


Coming soon to your mailbox: a cascade of "pre-approved" credit cards.

Banks are betting on the future earning power of college graduates and are eager to sign you up as a customer. It's a good bet: The U.S. Census Bureau says college graduates earn about twice as much as those with just a high school diploma. Workers with an advanced or professional degree do even better throughout their career.
Minyanville's Tips for June Grads
Here are five things you need to know to be smart with credit cards:

  • Limit the number of cards you carry in your wallet

  • Keep the credit limit low

  • Always pay the balance due in full each month

  • Keep an eye out for identity theft

  • Remember: You're building a credit history

These basic steps will prevent you from overspending and running up debt you can't handle.

"Some people try to solve their debt by buying a house and rolling everything into a single low-interest loan," says Stuart Ritter, a certified financial planner for T. Rowe Price, who teaches a class in personal finance at Johns Hopkins University. "You don't solve the problem of having lots of medium-sized holes by digging one big hole."

Ask yourself a basic question before signing up for a new credit card: How many do you need? A Visa (V) or MasterCard (MA) issued by a major bank such as JPMorgan Chase (JPM), Wells Fargo (WFC), Bank of America (BAC) or Wachovia (WB) will serve all your credit needs in most cases. Many cards also serve as a debit and ATM card, providing all the financial services you'll need.

If you already have a bank credit card, the credit limit is probably low. If you ask, the bank almost certainly will raise it when you've landed your first job. Caution: Keep the credit limit at a reasonable level because you don't want to overspend.

Paying the balance due on your credit card in full each month will strengthen your credit rating and you'll avoid the monthly finance charge of 20% or more that will eat you alive if you carry a balance from month to month. Paying the bill in full each month allows you to use the bank's money interest free for a month.

It's easy to be seduced by still easier credit. Many fall for unusually low introductory interest rates on credit card pitches, forgetting, or ignoring, the fact that market rates soon apply. Don't sign up for a credit card offered at the cash register by department or specialty stores. Many retailers offer 10% off the purchase if you open an account that day, knowing they'll make it up on interest payments if you don't pay the balance in full each month. Some recent graduates open multiple accounts at a range of stores, believing they're clever to save 10% on a string of purchases. But keep in mind that each application requires a credit check and too many inquiries may lower your credit score. That could drive up the future cost of loans.

You may want a card from a major oil company such as Chevron (CVX), ExxonMobil (XOM) or ConocoPhillips (COP). But many stations now take bank credit cards at the pump so you may not need a gasoline card.

Limiting the number of cards you carry also cuts the risk of identity theft and makes it easier to close existing accounts if the cards are lost or stolen.

If you use credit wisely, you'll build a strong credit history and won't have any trouble when you want to buy a house. But if you overspend and constantly run a balance due, you'll feel stressed about money and your credit rating will be in tatters, making future loans more expensive.

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