August 21, 1998
Back to School, Fool

The Perils of Plastic

College can be great. No parents nagging you with curfews. You can eat ice cream for breakfast and popcorn for dinner, if you like. And best of all, America's banks keep offering you credit cards! Right?

Fast-forward to your graduation. You've racked up $5,000 in debt on your card. Are you worried? Naaa. Your minimum monthly payment is only 2% -- just $100 per month. Consider a few other 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.

Now, even if you don't accumulate any more debt, it will take you over 43 years to pay off the balance if you just pay the minimums. Holy guacamole, Fool-man! All told, you will have paid nearly $18,000. No wonder the banks keep sending you unsolicited credit-card applications.

Here's another danger. Let's say that you're fired up to invest in stocks, but you still owe that $5,000, paying 18% annual interest on it. If your $5,000 stock investment nets you an 11% return, you're still losing money. Investing doesn't work well if you're in deep debt doo-doo.

At this point, you probably think we propose using credit cards only as shoehorns, eye patches, and after-dinner snacks. Not true. We get credit-card bills like anyone else. We just think that paying them off each month is critical to your financial health. And we recommend choosing cards carefully, using an electron microscope to read the fine print. Look for a low interest rate, no annual fee, no unreasonable penalty fees, 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 American Express card. The typical American household owes over $5,000 on credit cards. Be above-average, Fool. Graduate without credit-card debt.