If you’re a college student,
you probably already have a credit card. If not, you may
have plans to get one or more soon. So why should you read
on?
- Because financial debt
is one of the main reasons that many students end up
dropping out of college.
- Because your college
years can be some of your most memorable—and some of
your most costly. They don’t, however, have to be
the beginning of an adult life strapped with debt.
- Although you may still
feel in limbo between your teen years and adulthood,
it’s time to take charge of your finances and manage
them as an adult. The sooner you do, the sooner
you’ll be able to start saving and spending your own
money.
For those new to credit
cards and for others who know all about credit, let’s go
back to the basics.
Why do credit card
companies court college students?
It’s obvious by the
friendly representatives who offer a free t-shirt or CD
just for signing up in the student center. Or the
applications slipped into bookstore bags. Or mail boxes
crowded with card offers. Credit card companies want
college students to carry their card.
Did you ever stop to wonder
why? One reason is loyalty—once a person has a card in
their wallet, they are likely to keep that particular card
and its upgrades for years to come. Another reason:
college students are good customers.
While this may seem ironic
considering that most college students are without a
steady source of income, Robert Manning, Ph.D., Professor
in the College of Business at Rochester Institute of
Technology and author of Credit Card Nation, says this is
one example of how the credit card industry has changed
radically in the past decade or so. “Previously,
conservative rules deemed a good customer as one that paid
their bills on time,” he says. “Now, a good customer
is one that can’t repay their debt.”
“Credit is no longer an
earned privilege,” continues Dr. Manning. “It’s now
considered a social entitlement, and the screening
criteria (for card applicants) is weak.”
Banks make money by
charging annual fees, late payment penalties and interest
fees on unpaid credit card balances. Therefore, card
holders with revolving debt (those who do not pay their
balances in full each month) are desirable. NellieMae.org
illustrates this point beautifully through an example of a
student with a credit card balance of $7,000 at an
interest rate of 18.9%. If this student faithfully makes
the minimum monthly payment of 3% or $25 – whichever is
higher, and does not charge anything else to the account,
it will take more than 16 years and $7,173 in interest
fees to repay the bill!
Additionally, Manning notes
the banking industry has learned that college students
will draw upon various sources of income to pay their
debt—including student loans, money from part-time jobs,
and as a last resort, many will ask a family member to
supply the funds to get them out of debt.
How to make credit work for
you, not against you
According to Nellie Mae,
81% of college freshman have at least one credit card. And
for good reason. Credit cards enable online
purchases—from text books to concert tickets, make it
possible to rent a car, and help with medical emergencies
or vehicle breakdowns. Used wisely, credit cards can be
helpful throughout college, and can assist you in the
development of financial management skills.
As soon as you get your
first credit card or loan, you have entered the world of
credit reports and scores. A credit report is compiled by
credit bureaus and contains information about your
identity and credit relationships, among other things.
Credit scoring is a system that lenders use to help
determine your ‘credit worthiness.’ Credit scores are
based upon your bill-paying history, the number and type
of accounts you have, late payments, collection actions,
outstanding debt and the age of your accounts.
It’s vital to know that
your credit score affects your ability to get loans, car
loans, and home mortgages. Future jobs and insurance
premiums can also be influenced by your credit score. By
paying your bills in full or in a timely manner, a credit
card will help you establish a good credit score. Late
payment or no payment will help you earn a poor credit
score. For more information on credit reports and scores
and how they affect you, check out CardRatings.com.
Developing a new view about
credit
Mary Ann Campbell, CFP,
founder of MoneyMagic.com
and a money educator, cites unrealistic expectations as a
major reason for high student debt.
Campbell, who teaches
personal finance courses, says “Many students’
expectations of their earning potential after college far
exceeds what their actual income will be.” She notes
that some students use their credit cards with abandon
during college, planning to pay off their debt when they
land that great job after college. Indeed, some students
forget that in order to get to the top of the career
ladder, there are a few rungs, i.e., less paying jobs,
they have to climb first. And the expense of starting a
new job and life on your own can just add to existing
debt.
Manning’s website, CreditCardNation.com,
contains a great resource for students seeking a more
realistic view of the first few years after college. Using
the ‘Budget Estimator,’ a module designed by Manning,
students can identify an average yearly or monthly
starting salary for jobs in their particular major. The
program automatically figures in estimates for taxes and
social security payments. Students can then plug in
expenses for housing, car payments, utilities, food,
insurance, telephone and internet bills, clothing, credit
card bills, student loan payments, and entertainment, etc.
The module lets you know when you have spent more money
than you make, and allows you to adjust payments as
necessary until you get the hang of how your money is best
distributed.
Students that seem to have
the most credit woes? Those who believe their standard of
living during and after college should not vary from when
they lived at home on their parents’ income. Cable
television, cell phones with cameras, and new cars become
‘necessities’ instead of nice extras.
Advice to grow on
When it comes to credit
cards, students have great advice for other students.
Heather, a college junior from Arkansas, recommends
getting one card with a low limit. “This limits the
amount of credit you have access to and therefore removes
the temptation to spend more than you have or more than
you can pay off immediately,” she says.
Another student recommends
selectivity. “Don’t sign up for a card that charges an
annual fee to use it, and read the terms of the card
before applying. You wouldn’t believe how many people
don’t know what an APR rate is.” For more information
on finding the best rated cards, check out CardRatings.com.
You can read reviews of cards from other students and get
the lowdown on perks of various credit cards.
Campbell has three
recommendations for students: The first is open
communication. Campbell says students who are educated
about financial matters seem to have a better overall
attitude regarding credit cards. Students should find a
trusted source to talk openly with about money issues.
Second, students should switch from spending behaviors
(such as shopping) to activities that help you achieve the
same feeling of gratification or reward, such as
intramurals, exercise or campus organizations.
Last, but certainly not
least, enroll in a personal finance course as soon as your
schedule allows. Says Campbell, “If it’s not required
coursework, take it as an elective. You will learn a set
of life skills that will not only help you right now, but
also after college and for the rest of your life.”
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