I personally think there should be a Banking 101 course offered in high school these days. The sad reality is that kids aren’t getting the financial education they need in order to make informed decisions. But, that’s a soap box issue I won’t bring to this post. Instead, I want to offer some advice to those college students looking to get a credit card. Don’t just run with the first creditor that comes a knockin’.

No one is suggesting that you avoid credit cards altogether. They’re an undeniable fact of college life and there are plenty of good reasons to have one. One of the best reasons for a credit card is for protection of your money. If someone gets a hold of your debit card, they have access to all of your money in the bank and while your bank will most likely refund you your money, there’s still a process and you’ll have to wait for your funds to be returned. With a credit card, your hard-earned cash doesn’t disappear and you’ve got a little more fraud protection. If you’re anything like I was, you’re working part-time at a restaurant, waiting tables two nights a week with a weekend thrown in for good measure. Let’s be clear, it STINKS when your money is taken! So, I’m definitely not opposed to having a credit card in college.

Having said that, a common and very troubling perception among college students is that credit cards are basically free money. If you look over the paperwork thoroughly, you’re going to see that they’re usually high-interest loans in disguise. Here’s a typical breakdown of credit card fees that creditors offer to college students:

Finance Charge: This is the interest charged on the unpaid balance of your bill every month. It could be as high as 30% in some states. Make sure that you have a clear understanding of what your rate is before signing on the dotted line.

Cash Advance Fee: This is when you go to the ATM or to a financial institution and request cash off of your card. You really shouldn’t do this, but if you must then make sure you know the interest rate. It’s usually quite a bit higher than the finance charge and there are some pretty steep fees associated with it.

Late Payment Fee: If you’re late with your payments, most creditors charge you for that. Nice of them, huh? Find out what the fee is and try to avoid it!

Over the Limit Fee: I really hate this fee as it’s often the result of a late fee. Most companies charge you if you go over your designated limit on the card. You’ll want to be aware of this and I recommend cutting off card usage if you’re getting close.

Annual Fees: If a creditor is offering you a card with an annual fee, run in the other direction (unless this is a mileage reward card with a membership fee, in which case its up to you to decide if the benefits outweigh the costs). Beware of credit card companies that charge annual and monthly maintenance fees. There are too many good cards available that don’t require these fees, I see no reason you should get one if you don’t have to.

Keep in mind that carrying a balance over from month to month can be costly. Remember those finance charge we talked about? Yeah, there’s something else that goes along with that called compounding interest and in this case, that’s not a good thing. When you carry a balance over you’re charged interest on that balance. If the new balance, including the calculated interest, isn’t paid off by the next month, then you’re charged interest on top of interest and principle. It can become a vicious cycle and compounding interest is the reason many people are still trying to pay off their credit cards.

You can avoid these expensive fees and potentially damaging your credit report by being credit smart. Here are some tips to help you along the way:

1.) Read all application materials carefully and ask any questions that you’re unsure of. What happens after the “promotional rate” expires? What happens to an interest rate if you’re late or fail to make a payment? Does it increase? What about if you’re late with another credit card, does the creditor have a Universal clause?

2.) Use credit only if you’re certain you’ll be able to pay it back. As painfully obvious as this sound, this should be your mantra. The exception to this is if it’s an emergency situation and you need to use the card, but won’t be able to pay it back right away. Have a plan in place to pay it off as soon as possible, though.

3.) Avoid impulse shopping on your card. A good rule of thumb to live by is that if you don’t have the actual cash to buy it, you don’t need to buy it right now.

4.) Pay your bills on time! This cannot be stressed enough. Not only does this affect the amount of money you pay back, but it also affects your credit score.

At the end of the day, getting a credit card for college expenses is probably not a bad idea. However, you take on the responsibility of paying the card back when you accept the terms and conditions, so be sure you can live up to the agreement. If you can’t, then it will only hurt you in the long run. If you’re unsure, talk to your parents or ask a professional at your bank. There are resources available to help you with these kinds of things; you just have to be willing to look and be open to suggestions.

Related posts:

1. The Credit Card Newbies Guide (Part 2)
2. New Rules for February: College Students Won’t Be Receiving Any Valentines from Credit Card Companies in 2010
3. Debit Cards Vs. Credit Cards: Plastic Showdown
4. Credit Cards for people with really bad credit
5. A Primer: Secured Credit Cards