Plastic 101: A Sensible Credit Card Guide for College Students and Their Parents
Backpack, laptop, cell phone, digital music player, and credit card: these are the essential goods college students can't live without as they check into school for the new semester. In fact, the last item on the list is typically used to acquire the rest of the goodies. Add new clothes, Greek gear, workout shoes, and cool sunglasses and the list is nearly complete.
Unfortunately, many students fail to take along the most-important thing: a practical sense of responsibility when it comes to running up credit card debt. For most college students, however, these years are key to setting the stage for their financial future. Consider the following:
- Overwhelming debt is a leading cause of college dropouts. Many students are forced to take low-wage jobs just to make monthly payments.
- Creating a poor credit rating in your college years can plague you for the remainder of your adult life.
- Learning to effectively manage your money in college can set your up for future financial success.
NellieMae, a company that administers the Federal Family Education Loan Program, reports that 81 percent of entering college students own at least one credit card. Credit cards are tempting to students enjoying their first taste of adult life. Sudden purchases for wild spring break vacations to exotic locales are enticing. So is plunking down plastic to pay for concerts, bar tabs, new bikes, surfboards, stereos, flat-screen televisions, and more computer gear than you'll ever need. Additionally, the added security of having a credit card in case of emergency is appealing to students and parents alike.
Even though some students run up huge debts and eventually default on their credit loans, credit card companies continue to seek out student customers, bombarding campuses with enticing offers of cash back or low membership fees. Credit card companies know that once a student receives their first card, they often become a life-long customer. Walk through any student union and you'll find credit card company representatives sitting at tables, offering free sweatshirts, air miles, backpacks, or other goodies just for signing their applications.
Credit Cards: Privilege or Entitlement?
In the past, lenders were more scrupulous in evaluating applicants for credit cards. Typically, only consumers with a good credit score and established payment history were offered credit. Today, just the opposite appears true. Robert Manning, a professor in the College of Business at Rochester Institute of Technology and author of Credit Card Nation, claims that today's ideal credit card customer is one that cannot pay on time, maintaining a hefty balance and generating lots of interest charges.
Manning insists that although they were once reserved for elite consumers, credit cards are now handed out like candy to untested borrowers who have come to think of credit as a right rather than a responsibility. Students are high on that list. With compounding annual fees, interest on unpaid balances, and late payment charges, credit card companies love customers who can't make more than a minimum payment. In fact, many have developed schemes to entice consumers who have large, unpaid balances on one card to pay it off using another, transferring their debts and subsequent interest fees.
But credit card users who can only afford the minimum monthly payment can begin a spiral into greater and greater debt. It can take over a decade to pay off a just a few thousand dollars on a high-interest credit card bill if your monthly minimum goes mainly to interest and other penalties. While the you may believe you are faithfully paying your bill, your debt is barely shrinking.
Companies may prey upon students who have access to other income sources like scholarships, student loans, or sympathetic parents as a means of paying off their balances. It's a domino effect. Plunging deep into debt may cause you take a full or part-time job to meet monthly payments, jeopardizing your ability to perform in the classroom and perhaps to maintain your scholarship or loans.
Welcome to Adult Life
Once you own a credit card, you enter the realm of credit scores, debt histories, and potential defaults and bankruptcy. Your credit score is a compilation of factors including your payment history, your ability to pay on time, your total amount of debt, and any history of collections.
The data assembled by credit reporting agencies will follow you everywhere after college. A poor score can affect future credit, the cost of insurance, the purchase of a car, or your ability to secure a home mortgage. Once you have a poor credit score, you'll end up paying higher interest rates, making it increasingly difficult to pay off balances on time.
You might be thinking that after graduation you'll land a high-paying job that will allow you to rapidly dig out of the credit hole you created in college. In fact, that very free-spirited, irresponsible spending and buying you've done for four years can keep you from landing future jobs when employers check your credit history.
To help you plan your financial future, Manning offers a number of tools on his website, www.creditcardnation.com. For example, you can evaluate the kind of wages you might earn in different occupations. The Budget Estimator tool includes social security and tax payment estimates when calculating starting wages. Factor in your estimated housing, food, utilities, gasoline, clothes, entertainment, and transportation costs and see whether your new job will pay your way as well as contribute enough extra money to pay off your credit card debt. It can be a sobering experience.
Know Where You Stand
Many students may find themselves in financial trouble because of unrealistic expectations. To think you can sustain the level of living you enjoyed while at your parent's home may be totally unreasonable. Don't expect to make car payments, afford car insurance as a young adult, dine out on the town, and live in a luxurious apartment with your entry level salary. And if you put those costs on plastic, you run the risk of cascading down into deeper credit woes.
A few basic tips can also help you manage your credit more intelligently. For example, read and understand all the terms (and small print) on credit card applications. Do you know what an APR rate is? It might be time to find out. You should also avoid credit cards that charge an annual fee just to be a member. Finally, get your first credit card from a lender that establishes a low limit. That will help you pay off your monthly balance without having to pay interest or penalties.
To increase your odds of choosing the right credit card, the website CardRatings.com offers comparative data on interest rates, incentives, and perks from various lenders. There are also student reviews on cards and enrollment plans.
If you take time to learn about credit, the terms affecting payments and penalties, and how to balance your budget while in school, you stand the best chance of surviving temptation and not making impulsive spending decisions. Find a trusted friend, classmate, relative, or financial advisor to teach you the ropes.
Enrolling in a personal finance course or campus seminar can also do wonders for your relationship with money and credit. The skills you learn will benefit you for the rest of your adult life. Just as a poor credit record can negatively influence your life trajectory, being smart about money management can make all the difference in your future success.
But the best tip to avoid credit card debt is to watch your spending while in college. There are plenty of campus activities that are thoroughly enjoyable that cost almost nothing. Playing an intramural sport, going dancing, or joining the French club will leave you with plenty of memories, but very few bills, after you graduate.