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Ask 4 Questions Before Paying College Tuition With a Credit Card

From airline miles to free hotel nights and cash back rewards, the perks of paying with plastic add up fast.

So it may be tempting for families already shouldering the cost of college to want to cash in on those benefits when paying tuition.

After all, charging the fall semester bill to a credit card could earn Junior a free Thanksgiving flight home. Paying for spring semester with plastic could net a few hundred dollars toward a laptop.

Of the 300 largest public, private and community colleges, 87 percent accept credit cards for tuition payments under at least some circumstances, according to a survey from CreditCards.com.

But paying with plastic has its risks.

Here are four questions to ask yourself before charging tuition to a credit card.

1. Is there a fee for that? Covering tuition with a credit card carries an average convenience fee of 2.62 percent, according to the CreditCards.com survey.

That may seem small at first, but it can add $262 to a $10,000 bill, easily wiping out a 1 percent cash back offer or double miles bonus. “The math starts to work against you pretty quickly,” says Matt Schulz, senior industry analyst at CreditCards.com, who also contributes to the U.S. News My Money blog.

Not every school levies a credit card fee against students. But of the schools surveyed, just 23 four-year institutions accepted credit card tuition payments from undergraduate students without fees or restrictions. Community colleges tended to be more generous.

[Weigh the pros and cons of a community college bachelor’s degree.]

2. Can I pay off my card each month? It might be tempting to use credit in place of a student loan when money is tight and tuition is due.

But that gets expensive fast, say experts.

Federal student loans carry interest rates between 4.66 percent and 7.21 percent in the 2014-2015 academic year, depending on the loan.

A typical credit card rate was between 13 and 16 percent at the close of last month, according to Bankrate.com, which aggregates rate information on financial products.

Neglect to pay off the balance each month, and the extra interest could compound quickly.

The biggest risk to paying with a credit card is not paying it off in time and finding yourself slammed with tons of interest, says Brian Kelly, founder of ThePointsGuy.com, a site about maximizing rewards on credit cards. That would wipe out any rewards earned on the transaction as well, he says.

In addition to avoiding the risk of compounding interest, student loan borrowers, who meet various eligibility requirements, gain access to alternative repayment plans, such as income-based repayment, loan forgiveness and a student loan interest tax deduction. Those are benefits a credit card repayment plan won’t offer.

3. Will it ding my credit score? Credit reporting agencies look at the credit utilization ratio, the amount of available credit a borrower uses, to determine a person’s credit score.

Experts recommend keeping the ratio below 30 percent, meaning that someone paying a $10,000 tuition bill would need to have access to more than $30,000 in credit to stay below that threshold.

“It is a very important portion of a credit score and formula,” says Schulz. “If you charge $15,000 in tuition that would put a serious hurt on your utilization ratio.”

[Learn how student loans affect your credit score.]

Empty-nesters, seeking to buy a new home, for example, might want to avoid doing anything to jeopardize their score and make qualifying for a mortgage more difficult.

4. Can I handle it? If a parent has enough cash on hand to repay the credit card bill immediately, a generous credit limit and is sending their child to a school that charges no credit card fees, then it may make sense to use that card to pay for tuition.

But it’s still risky, says Beverly Harzog, credit card expert and author of “Confessions of a Credit Junkie: Everything You Need to Know to Avoid the Mistakes I Made.”

[Find alternatives to a student credit card.]

“You’re walking a high-wire when you’re doing these kinds of things,” she says. “Be ready to take that risk.”

And students should avoid the strategy completely, opting for student loans instead. “Students generally have less credit education and are more susceptible to making mistakes and missing payments,” says Kelly.

After all, taking on student loan debt is burden enough without adding credit card repayment to the mix.

Trying to fund your education? Get tips and more in the U.S. News Paying for College center.

Susannah Snider is an education reporter at U.S. News, covering paying for college and graduate school. You can follow her on Twitter or email her at ssnider@usnews.com.

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Millennials Prefer Plastic to Cash for Small Purchases

If your cup of coffee is less than $5, chances are you’re going to pull out cash to pay for it – unless you’re a millennial. Then you’re more likely to whip out plastic, regardless of how big or small your purchase is.

According to a recent survey by CreditCards.com, cash has long been king when it comes to small purchases (under $5). Overall, about two-thirds of credit card-carrying Americans pay for small purchases with cash, 22 percent use debit cards and 11 percent use credit cards.

But the younger generation is helping to change those figures.

CreditCards.com said:

The generational divide is striking. A slight majority (51 percent) of consumers 18-29 prefer plastic to cash, the only age group to do so. A preference for cash becomes stronger in each advancing age bracket, until at age 65-plus, 82 percent prefer cash.

Financial experts say paying with plastic isn’t bad. But millennials are using debit over credit by a near 3-to-1 ratio. Debit cards offer fewer protections for consumers. Plus, they don’t help build credit.

Both offer solid protection from fraud in case your card is lost or stolen, particularly if you report the disappearance in a timely fashion. However, Matt Schulz, senior industry analyst for CreditCards.com, told MarketWatch:

“If your debit card information gets stolen, somebody can take real money out of your account that you won’t be able to use to make a car payment or a doctor’s bill,” Schulz says. “That money may be gone for a week or two.”

Some people opt to pay with a debit card because they’re trying to be money-conscious, limiting their purchases to money they have. Bloomberg Businessweek said:

Debit cards work a lot like cash because the money comes straight out of a checking account. A credit card is more complicated. It can be a better choice than a debit card if you pay off your card in full each month because you get what amounts to an interest-free loan and rewards points to boot.

Other survey findings include:

Got kids? Parents are more likely (41 percent) to use cards to pay for purchases under $5 than people without kids (30 percent). As a parent, I usually don’t have enough free hands to fiddle with change, so using a card is easier. College-educated are comfortable with plastic. Americans who have graduated or attended college use plastic twice as often (39 percent) to pay for small purchases than their counterparts who haven’t attended college (22 percent). Politically, we’re on the same page (about one thing, at least) . When it comes to paying for a small purchase, 30 percent of Democrats and 28 percent of Republicans prefer plastic to cash.

I rarely carry cash. But if I have it on hand, I use cash to pay for small purchases.

Do you use cash, credit or debit to pay for small purchases? Share your comments below or on our Facebook page.

This article was originally published on MoneyTalksNews.com as ‘Millennials Prefer Plastic to Cash for Small Purchases’.

Banking & BudgetingEmployment & Careercredit cardsdebit cards […]

Signature Cards More Prone to Fraud

Using your credit card to draw cash at an ATM or writing one of those handy checks that comes in your monthly card statement can cost you plenty: typically around 24% annual interest, which is 6 percentage points more than the average interest rate cardholders pay on purchases.

Oh, and don’t forget the typical 5% fee that card companies charge for a cash advance.

Those figures are drawn from a new CreditCards.com survey of cash-advance rates and fees on 100 top cards, the first look of its kind at this widely available but costly credit card loan product. Its findings help support the advice of credit counselors, who say that cash advances should be used only when consumers exhaust other, less costly options. Unlike using cards for purchases — which offer an interest-free grace period if you pay off your statement in full and on time — interest on cash advances starts immediately, so costs can balloon if the debt is not repaid quickly.

The CreditCards.com survey also found: ;

Cash-advance interest rates ranged from 9.99% (on three cards from federal credit unions) to 36% (First Premier Bank Gold MasterCard). The median interest rate on cash advances was 24.24%. The median difference between interest rates on purchases versus cash advances was 6 percentage points. Seven cards generously offered the same rates on purchases as cash advances. On the other end, two cards charged interest rates a full 11 points higher for cash advances than for purchases. On fees, most cards charge 3% to 5% for a cash advance, with a $10 minimum charge.

To conduct the survey, CreditCards.com reviewed the cash advance policies of 100 of the most popular and nationally available general purpose credit cards.

Rarely used, but fees rising
Overall, cash advances are a seldom-used feature of credit cards. According to an October 2013 report by the Consumer Financial Protection Bureau, just 3.1% of active credit card accounts took cash advances in a three-month period at the end of 2012, down from 4% four years earlier.

The report also found that cardholders are taking cash advances less often and in smaller amounts than they used to. However, cash advance fees rose to an average of 4.9%.

Credit counselors generally frown on taking cash advances to pay ordinary expenses, and consumers tend to use them when they have few other options. Financially, it is almost always better to pay a merchant with a credit card or to use existing funds from a checking account before drawing on a cash advance and incurring the associated fees and high interest charges. But there are some circumstances in which using a cash advance could be understandable, especially in emergencies.

Rich Van Rooyen, a 42-year-old software developer in Stratford, Ontario, says he took out a cash advance only once in his life. He and his wife Jana were driving in a remote section of Canada nearly 20 years ago when his Ford Escort hit a crevice in the road, blew out the two passenger-side tires and damaged the rims.

Fresh out of college, he had little money and no credit cards to pay the $1,200 repair costs. Jana only had a Discover card, which was not widely accepted in Canada. The couple found a nearby Sears store and was able to take a cash advance to cover the costs. Van Rooyen says he repaid it quickly.

“This was a last resort,” he says. “There was no other money. There was no other way. It was an act of desperation.”

Why the high rates?
Banks say they charge higher rates for cash advances than for purchases because cash advances reflect a higher risk of not being repaid. In addition, banks routinely set a lower limit for cash advance withdrawals than the overall credit limit on their cards.

Darrin Graham, vice president of marketing with Premier Bankcard, which offers a MasterCard with 36% interest, says rates are higher than other cards because most of the people with the card are trying to rebuild their credit after past problems. In a news release two years ago, the bank said it issued about 70% of the nation’s credit cards offered to people with credit scores of 600 or lower.

“It’s about managing the risk with these people,” he said. “It’s like car insurance. If you’ve had an accident in the past, you will pay higher rates for awhile.”

He says Premier Bankcard does “absolutely no marketing” of cash advances, but that the service is available to those who might need it.

Several big banks declined to discuss cash advance policies for this article, but they pointed to articles or Q-and-A’s on their websites that disclose how customers can receive a PIN to access cash advances, and the fees they charge.

Discover, for instance, suggests that cash advances can come in handy for emergencies or “‘cash-only’ situations such as paying for kids’ camps and sports fees or giving a last minute gift.” Bank of America offers some tips for avoiding the need for a cash advance, such as creating a budget and building an emergency fund.

Effect on consumers
The interest rates and fees for cash advances can be substantial — and they can cost you hundreds of dollars more than other alternatives.

Say your employer has fallen on hard financial times and furloughs you without pay for two weeks. You’re unable to afford your share of the rent, which is $1,000. If you take a cash advance to pay it, and repay that amount in a year by making payments of $100 a month, you would pay about $190 in fees and interest, assuming the typical rates identified in the CreditCards.com survey.

If there’s an upside, maybe it’s that the interest and fees on credit card cash advances are less than what they would be for payday loans, whose rates, when annualized, approach 400%.

[…]

The high cost of credit card cash advances

Using your credit card to draw cash at an ATM or writing one of those handy checks that comes in your monthly card statement can cost you plenty: typically around 24 percent annual interest, which is 6 percentage points more than the average interest rate cardholders pay on purchases.

Oh, and don’t forget the typical 5 percent fee that card companies charge for a cash advance.

Those figures are drawn from a new CreditCards.com survey of cash-advance rates and fees on 100 top cards, the first look of its kind at this widely available but costly credit card loan product. Its findings help support the advice of credit counselors, who say that cash advances should be used only when consumers exhaust other, less costly options. Unlike using cards for purchases — which offer an interest-free grace period if you pay off your statement in full and on time — interest on cash advances starts immediately, so costs can balloon if the debt is not repaid quickly.

The CreditCards.com survey also found:

Cash-advance interest rates ranged from 9.99 percent (on three cards from federal credit unions) to 36 percent (First Premier Bank Gold MasterCard). The median interest rate on cash advances was 24.24 percent. The median difference between interest rates on purchases versus cash advances was 6 percentage points. Seven cards generously offered the same rates on purchases as cash advances. On the other end, two cards charged interest rates a full 11 points higher for cash advances than for purchases. On fees, most cards charge 3 percent to 5 percent for a cash advance, with a $10 minimum charge.

To conduct the survey, CreditCards.com reviewed the cash advance policies of 100 of the most popular and nationally available general purpose credit cards.

Rarely used, but fees rising
Overall, cash advances are a seldom-used feature of credit cards. According to an October 2013 report by the Consumer Financial Protection Bureau, just 3.1 percent of active credit card accounts took cash advances in a three-month period at the end of 2012, down from 4 percent four years earlier.

The report also found that cardholders are taking cash advances less often and in smaller amounts than they used to. However, cash advance fees rose to an average of 4.9 percent.

Credit counselors generally frown on taking cash advances to pay ordinary expenses, and consumers tend to use them when they have few other options. Financially, it is almost always better to pay a merchant with a credit card or to use existing funds from a checking account before drawing on a cash advance and incurring the associated fees and high interest charges. But there are some circumstances in which using a cash advance could be understandable, especially in emergencies.

Rich Van Rooyen, a 42-year-old software developer in Stratford, Ontario, says he took out a cash advance only once in his life. He and his wife Jana were driving in a remote section of Canada nearly 20 years ago when his Ford Escort hit a crevice in the road, blew out the two passenger-side tires and damaged the rims.

Fresh out of college, he had little money and no credit cards to pay the $1,200 repair costs. Jana only had a Discover card, which was not widely accepted in Canada. The couple found a nearby Sears store and was able to take a cash advance to cover the costs. Van Rooyen says he repaid it quickly.

“This was a last resort,” he says. “There was no other money. There was no other way. It was an act of desperation.”

Why the high rates?
Banks say they charge higher rates for cash advances than for purchases because cash advances reflect a higher risk of not being repaid. In addition, banks routinely set a lower limit for cash advance withdrawals than the overall credit limit on their cards.

Darrin Graham, vice president of marketing with Premier Bankcard, which offers a MasterCard with 36 percent interest, says rates are higher than other cards because most of the people with the card are trying to rebuild their credit after past problems. In a news release two years ago, the bank said it issued about 70 percent of the nation’s credit cards offered to people with credit scores of 600 or lower.

“It’s about managing the risk with these people,” he said. “It’s like car insurance. If you’ve had an accident in the past, you will pay higher rates for awhile.”

He says Premier Bankcard does “absolutely no marketing” of cash advances, but that the service is available to those who might need it.

Several big banks declined to discuss cash advance policies for this article, but they pointed to articles or Q-and-A’s on their websites that disclose how customers can receive a PIN to access cash advances, and the fees they charge.

Discover, for instance, suggests that cash advances can come in handy for emergencies or “‘cash-only’ situations such as paying for kids’ camps and sports fees or giving a last minute gift.” Bank of America offers some tips for avoiding the need for a cash advance, such as creating a budget and building an emergency fund.

Effect on consumers
The interest rates and fees for cash advances can be substantial — and they can cost you hundreds of dollars more than other alternatives.

Say your employer has fallen on hard financial times and furloughs you without pay for two weeks. You’re unable to afford your share of the rent, which is $1,000. If you take a cash advance to pay it, and repay that amount in a year by making payments of $100 a month, you would pay about $190 in fees and interest, assuming the typical rates identified in the CreditCards.com survey.

If there’s an upside, maybe it’s that the interest and fees on credit card cash advances are less than what they would be for payday loans, whose rates, when annualized, approach 400 percent.

Fed: Credit card balances shot up OctoberThe high cost of credit card cash advancesRegretting your recent cash advance? You’re not aloneFinanceCreditcredit cardinterest rate […]