Credit Card Debt: It happens to the smartest college students

Photo by Cathryn Shaffer

Picture yourself in the not-too-distant future, after years of toiling away in classrooms and libraries, finally graduating from college. As you walk across the stage in front of family and friends, you’re carrying a wealth of knowledge, a prestigious degree and … an enormous amount of credit card debt! Unfortunately, this is the case for many American college students.



The “Can’t Leave Home  without It” Syndrome


Here in the United States, where “paper or plastic” now refers to
options for payment rather than shopping bags, college-bound students
are armed to the teeth with unimaginable access to credit. Going to
college and being on your own is a huge responsibility; it calls for
good sound judgment that few high school graduates possess. But college
life is also a huge temptation. “I’ll take care of it later,” “Got to
have” a new pair of expensive jeans, “Everybody’s getting something new
for homecoming” – and the notorious ‘let’s decorate our room alike’
sisterhood – are the sort of spontaneous spending decisions that few
students can resist. That’s why students need to learn rational
thinking about money before spending unwisely.


Parents – Educate Yourself and Your Student Before They Leave For College


Many parents or
guardians assume that college administrators are responsible for their
children away from home. Colleges are expected to provide a safe,
nurturing environment and a safe haven from all outside predatory
forces; they also deliver academically to the extent that the student’s
objective is to learn. But at most colleges, personal financial
decisions are left to the judgment, such as it is, of undergraduates
and/or their personal guardians.


So What’s The Lesson  – Do The Math!


According to
Nellie Mae, a leading provider of higher education loans, a study of
2005 student loan
applications showed that students held an average of
three separate credit cards.

•    78 percent of undergraduates had at least one credit card;

•    32 percent had four or more credit cards;

•    95 percent of graduate students carried credit cards.


The average
credit card debt owed by college students is about $2,700. Close to a
quarter of students owe more that $3,000, and 10 percent owe more than
$7,000! Even without that kind of debt – and many with college loans,
as well – new graduates are hard pressed to afford housing,
transportation, a professional wardrobe, and the other necessities of
adulthood. With an additional debt burden, starting out on your own is
even more of a challenge. For those in college or getting ready to go,
here are some ways to keep your debt in check.


Discuss Your Finances with Someone You Trust


Before you leave
for college, talk with your parent, guardian, or someone you trust to
help you plan a budget for the year. In addition to a realistic
assessment of costs for books, supplies, clothes, food, and reasonable
entertainment (dining out with friends, concerts, etc.) it should
include setting aside some money for unanticipated financial needs.


Use Cash Instead of Plastic whenever possible.


If you feel you
must have a credit card, don’t take it with you everywhere you go. A
lunch at the student union here, a night on the town there, tickets to
a concert … it all adds up. Don’t fall prey to the pressures of your
friends wanting you to use your card, even for a minimal purchase.
Chances are when the bill comes, the memories of those charges will be
long forgotten, and you’ll be stuck with the bill. Keeping your credit
cards in your wallet – or better yet, locked up in your room – and
using cash will prevent a nasty surprise at the end of the month, and
when you graduate.


Penalties on Late Payments Can Be Excessive


Make sure you
understand how fast the penalties for late payments and interest
charges can add up on credit cards. If you are making just the minimum
2.5 percent monthly payment on a $1,000 outstanding balance with 19
percent interest, you’re reducing your debt by only $9 or $10 per
month. It will take you seven years to repay and cost you $730 in
interest – which is a total cumulative interest rate of 73 percent. At
the very least, add $10 or $20 to the minimum payment due. The extra
money all goes to reduce principal. And pay on time – an additional
late fee of $30 or $35 per month doesn’t reduce your debt, just your
checking account balance.


If You Must Have a Card, Make It a Debit, or a Secured Card


Debit cards
allow retailers to deduct the amount of a purchase immediately from a
bank account; they also work at automated teller machines if a student
needs cash. You’re spending your own money rather than borrowing.
Secured credit cards require that the student set up a savings account
of several hundred dollars as a backup against a default line of
credit.


Don’t Forget Your Student Loan


If you need a
student loan to pay for your education, be ready to start paying it
back as soon as you have your degree in hand. The first bill may arrive
as soon as one month after you graduate. You can think of
“commencement” as the commencing of the education bills, so be
prepared. You may have a hard time paying off your student loan if
you’re too busy paying off your credit card bills.


Be smart – use
credit wisely. Otherwise you could be fighting your way out of debt for
more years than it took you to get through school.