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Student Credit Cards: What Is the Real Interest Rate?

Now that you are a college student, credit card companies are going to court you with a passion you only wish you could see from prospective boyfriends or girlfriends. To a credit card company, you are their dream date: young, with a clean credit report and (they hope) no understanding at all of how credit cards work. They want you to take a credit card with an irresistibly low introductory rate, spend madly, and owe them thousands upon thousands of dollars when your interest rate shoots up at the end of the introductory period. Let's make sure that doesn't happen.

The first tip is to not be suckered by that bright, shiny "0 percent interest rate" printed on the front of the brochure. That is the introductory rate. After a set period, probably six months, it vanishes, and suddenly you owe the real interest rate. The interest rate on a student credit card is typically a little higher than the rate for an older person's credit card, and is currently around 13 to 20 percent. Student default rates zoom up to 25 to 31 percent if your payment is even a day overdue. The higher rate is retroactive, so regardless of what the rate was when you bought something, you will be billed at the higher interest rate until you pay your entire balance off. When your interest compounds, you might end up paying two or three times the original cost of an item.

The key is to choose a card with the lowest possible regular interest rate, then spend as though you were already paying that rate on your purchases. The fine print or the chart on the back of the form will tell you a credit card's real interest rate. The standard purchase annual percentage rate (APR) and the standard cash advance APR are what you are looking for. These are the rates you will pay after the introductory period ends. Compare all the student credit card offers you have received, paying no attention to the introductory rates and all the frequent flyer miles or other frills. The only numbers you care about at this stage are the standard purchase APR and the standard cash advance APR.

Once you have narrowed the selection down to a few cards with the lowest regular interest rates, search the fine print for gotchas like high default interest rates and annual fees, and eliminate any cards that have them. Now that you have a few likely offers with low interest rates and no nasty surprises, you are free to consider rewards packages and pick the student credit card you like best. Enjoy your new credit card and set the foundation for your future credit... on your terms.