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Overcoming Credit Card Debt: A Strategy for Students

Your college days should be exciting, informative, creative and--aside from the pressures of making the grade--trouble free. It won't be long before you graduate and enter the world of finding employment, marriage, buying a home, and raising children. While you won't be dining on steak and lobster every night, you should be able to have fun, attend sporting events and concerts, and spend your limited money after paying tuition and books on carefree fun to blow off steam from completing exams and papers.

While most students have a respite from having to pay home insurance, health-care premiums, mortgage payments, and child care, too many pile up thousands of dollars a year in credit card debt from living by the false belief that they're free of financial responsibilities. Some students arrive on campus for their freshman year with as much as $7,000 in credit card debt. Consolidated Credit Counseling Services Inc. reports that nearly 40 percent of college students apply and receive a credit card while in college, while a fifth of freshmen arrive at their dorms with a card in hand.

The Temptation Is Real

When you consider all the carrots dangled by credit card companies for cash-back or air rewards in the form of campus mail and endless Internet borrowing offers of low introductory rates for students, it's no wonder college students get hooked. A Nellie Mae survey from 2001 confirmed that 83 percent of enrolled students have an outstanding balance averaging $2,327 on at least one card.

You run a huge risk by running a large balance in school. Since you may not have an off-campus job while enrolled, you can find your balance and credit fears rising and your grades plummeting. Some students are forced to drop out of class to find a job to pay against the balance, while still others find they have to take low-paying jobs because they haven't completed their degree, plunging them into a vicious debt cycle. Students run a high risk of graduating with a poor credit rating, making it difficult for them to gain jobs, housing, cars, and cell phones. Ultimately, for some, the pressure grows, and personal relationships falter.

Open Season on Student Borrowers

Rochester Institute of Technology Professor and author of Credit Card Nation, Dr. Robert D. Manning, discovered that many card companies dropped requirements for parents to co-sign for accounts and removed $300-$500 credit card limits on students at the end of the 1980s. While credit card borrowing helped students offset costs typically borne by their parents for their full education, along came credit burdens when students began to run up exceptionally high balances and interest penalties.

It's Dr. Manning's belief that students who are taught earlier in life about the pitfalls of credit and borrowing may be better suited to handling a credit card at college. Other credit experts recommend waiting, that students reach a level of maturity in junior and senior years when they may be more responsible in handling borrowing and short-term debt. Either way, it is up to parents to let their college-age students understand that temptation is awaiting them once they leave home.

Center for Student Credit Card Education founder and executive director Dr. Carol Carolan encourages parents to educate their college-bound children about credit cards, payments, and debt. Simply getting a card does not mean you can use it without consequence. Parents, Dr. Carolan asserts, need to understand--before agreeing to co-sign for a credit card--whether their child is mature enough to handle the responsibility. She added that parents should:

  • Co-sign only on credit cards that don't carry annual fees and which establish a credit limit on borrowers. You should search for the best credit cards and compare terms and restrictions.
  • Review your student's credit card statement each month and go over purchases and balances.
  • Have an intelligent conversation with your student about interest rates, particularly those applied to cash advances, transfers, and purchases.
  • Go over your own statements to show your student how finance charges work and about interest, penalties, and fees that run up when you don't retire your balance each month.

Of course, if you're not a conscientious credit card customer in the first place, you won't set a very good example for your son or daughter. So long as you're educating your student, let them know that having a credit card doesn't mean they have to respond to every impulse or advertising come-on that grabs their fancy. They should learn to be sound consumers from the beginning of their adult lives.

Colleges Fight Back

Students can be easily enticed by banks and lenders that offer credit cards with fancy sports or entertainment logos on them. Universities had previously encouraged credit card issuers to appear at information tables in student unions and college events, earning revenues for having them on campus. However, Manning says, almost 1,000 colleges today have either changed their stance or are considering preventing on-campus marketing by credit card companies.

Some colleges, such as the University of Central (UCA) Arkansas and Rochester Institute of Technology (RIT), have created required coursework in consumer and personal finances to better educate students who are living with temptation. Professor of personal finance at UCA and professional speaker with Money Magic, Inc., Ann Campbell is working on her dissertation on student credit card debt and is dedicated to informing parents, students, and faculty about the risks of irresponsible borrowing.

She is not opposed to students acquiring plastic, but she wants students to know, like any other privilege, getting a credit card carries responsibilities. On the plus side, she tells students, getting a credit card early in life can help them build a solid credit rating that can be beneficial when they graduate into the world of finding employment, loans, insurance and buying homes or automobiles. In the hands of a responsible adult who pays off balances promptly, a credit card can provide a powerful means of buying necessary items with convenience and security. On the negative side, however, students need to know that borrowing decisions and payment actions they undertake while on campus can alter the credit trajectory of their adult lives for the worse.

Taking Stock of Your Financial Life

In addressing students directly, Campbell suggests that:

You need to learn the power and effect of compound interest. When you receive it through an investment, it can provide huge returns, but when you borrow or buy and allow compound interest to accrue, it can put you in the poorhouse. Examine all purchase terms carefully. The interest alone can wipe out any savings you gain on a sale price.

  • Become your own best auditor. Use accounting software or create spreadsheets that track every purchase, your debt, the amount of interest, bank fees, and payment deadlines. Save all your receipts. In some cases, your education purchases may be tax deductable.
  • Always pay more than the minimum balance on your due date. Even if it's a small amount, it will fight back against potentially crushing interest. If you own more than one card with a balance, retire the one on the one with the highest interest rate first, and work your way down through the cards.
  • Consider your credit score along with your grade point average. Both can have a lasting impact on your days following graduation. It can take years out in the working world to repair your credit.
  • If you end up in crisis, don't try to finagle your way out alone. Tell a family member, a member at the counseling center, a teacher, a spiritual leader, or your best friend. There are credit counseling agencies that offer free appraisals.
  • Get creative with your class assignments, but remain prudent and conservative with your borrowing and spending.

Bringing It All Home

Just as earning your grades are up to you, maintaining good credit and using credit cards wisely through your college years is your responsibility. At times, you may find the temptation to flash the plastic at the student store, at campus watering holes, on semester breaks, and holidays. Ask yourself, do you really need the latest DVD, an extra set of Greek sweats, or a ticket to a rock festival? How do you plan to meet the balance at the end of the month?

Success now will pay off later. CreditBoards is a forum where students and professionals discuss credit issues. Member Dwayne Blew recounts how his responsible actions at school helped him build a good credit rating. He went to college to help him earn a good income following graduation, he says. Why would you want to ruin those chances by messing up your credit score and plunging into debt or depression?

College can mean the final opportunity to experience a life without the pressures of family and the everyday working world. If you find a balance between studying, relaxing, and having fun with friends--without running up a crippling debt--you'll remember these days with pleasure.