Mathematics for Business and Personal Finance

Chapter 7: Charge Accounts and Credit Cards

Business Math in Action

Give Yourself Credit, but Carefully

The inexperienced, often careless use of credit cards is a big reason why young adults today are referred to as "Generation Debt." For the past two decades credit card companies have targeted college students by setting up tables on campus and offering free T-shirts, coffee mugs, and water bottles to anyone who fills out an application. These trinkets cost the credit card companies virtually nothing compared to the money they can make in the long run off these potential customers. Market research has shown that young people often remain loyal to the first cards they get.

Credit cards are good to have in case of an emergency. If you use them wisely, they can help you build a strong credit rating that will make it easier to get a car or home loan later on. The problem is that too many students are unaware of basic facts about credit cards. Recent surveys found that:

  • Some students do not realize that a credit card contract is a legal document. You are legally required to pay off all the debt, not just the minimum monthly payments.
  • Many students do not understand how finance charges and late fees work. Making a late payment can result in the finance charge jumping to well over 30 percent for as long as they have the card.
  • Many students have several cards and pay only the monthly minimums on each.
  • Students rarely shop for cards with low interest rates. Instead, they sign up with whatever company sets up a table on campus. Even at schools where credit card companies are banned from campus, they target students by setting up just off campus, or sending offers through the mail.
  • Few students realize how damaging bad credit can be to their future. A poor credit rating can make it difficult to buy a car or a home, to travel for business, or to rent an apartment.

Over the past several years, changes in lending laws have made it easier for credit card companies to make even more money off consumers. Their tactics include mailing bills late so customers have only a few days to make a payment before being slapped with a late fee; increasing late fees; and shortening or ending grace periods.

If you carefully shop for credit cards, learn to read the fine print on the application, and control your spending, you are far less likely to go into debt. A few guidelines:

  • Get only one credit card. That way you have one bill every month and can see exactly how much you owe.
  • Research credit card companies and choose a card that has low combined interest rates and finance charges.
  • Get a card with low or no annual fees.
  • Be sure to find out what the annual percentage rate will be after the low introductory rate is over. The low rates usually expire three or six months after you get the card.
  • Do not use your credit card to borrow cash. The interest rates for cash are much higher than they are for store purchases.
  • Do not pay only the minimum monthly payment. Instead, try to pay off the balance every month, or pay as much as you possibly can. If several months go by and you cannot pay off that balance, you are spending beyond your means. Put the card in a drawer and go back to using cash until you have paid the balance in full.

English Language Arts/Writing

Credit Cards

Create a list of questions you would ask the people running a credit-card signup table on a college campus in order to decide whether the card is a good deal.

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