Helping Students Avoid Credit Card Debt
Student credit cards can pave the way for a bright financial future. When managed well they provide an opportunity for students to build the credit history they may need upon graduation to rent an apartment or purchase a car. Unfortunately, without care, student credit cards can also pave the way for financial disaster and burdensome debt. Essentially, a student credit card is a loan agreement. When you apply for a credit card, the creditor will establish a spending limit from which you borrow for purchases and/or cash. Each time you make a purchase your creditor pays the vendor (for example, Visa will send a check to the Gap for your new jeans). You then owe that money to the creditor. You may not exceed the limit established by the creditor (without incurring hefty penalties) although; with time and history the creditor may increase your spending limit. The money you "borrow" is repaid to the creditor each month with interest. There are fees for the privilege of credit. When you purchase an item on credit you will pay more than if you purchased the exact same item with cash. Remember that when you use credit you are borrowing. The creditor makes money by charging interest each day that you carry an outstanding balance. You limit the amount of money that you repay if you pay your balance in full each month. Before you decide if a student credit card is right for you: o Examine your reasons for wanting a student credit card (will you use it for emergencies or impulse buying?). o Honestly assess your current level of financial responsibility (do you now maintain a budget and handle money/bills/other accounts responsibly?). o Read and understand the terms of the credit card you are considering carefully (How will late payments affect your interest rate? What terms can you expect after the introductory rate expires? How much are the associated fees? How long is the grace period?). There are many types of student credit cards available. Some are available to high school students. Others are available only to those 18 or older and enrolled in an accredited four-year college or university. Some require that parent's co-sign and others give credit based solely on the student applicants information and promise to pay. Many student credit cards come with very attractive introductory or teaser rates. These are perfect for racking up student credit card debt. Make sure you understand how long the rate will remain in effect as well as how much the regular rate will be and how your outstanding balance will be affected after the rate changes. Not all student credit cards come with great rates. Some come with higher rates and/or annual fees, but may offer reward points to use at stores students are likely to frequent. Weigh the pros and cons of every option against your reason for carrying a credit card and the impact it will have on your long-term financial goals. Student credit cards are very lucrative for creditors and are often viewed as relationship builders. Your student credit card debt builds their bottom line. Also, creditors are hoping that the relationship you establish while in college will be expanded when you land full time employment. Student credit cards are available, seemingly, at every turn. Students can apply on campus at tables loaded down with incentives that invite students to apply for disaster (interest rates and/or late fees can make that t-shirt or Frisbee very expensive in the long run). There is also the avalanche of offers that arrive in the daily mail for consideration. It can be very easy to sign on the dotted line with no more than a passing thought to your financial future. If you decide that you are ready for a student credit card, limit your selection to one card. Pay the balance in full each month, if possible. If that is not possible, always pay more than the minimum and above all, pay on time. Late payments jeopardize your credit rating and may even result in default rates (which are significantly higher than regular interest rates). Parents should be aware of the credit choices their students are making. Very often, if students do not handle credit responsibly, parents feel obliged to bail them out of debt. This can be a hardship for parents and may even give students the wrong message. It is important for parents to be proactive and talk with students early on about responsibilities and expectations around credit management and debt avoidance. If you want your student to have access to money for emergencies but feel uneasy about the prospect of bailing your student out if problems arise, consider: o a credit limit of only a few hundred dollars o a debit, rather than credit card (it does not build a credit history, but it does minimize credit problems if your student is not ready) o monitoring the credit card account online or with duplicate billing (you can keep an eye on expenses/payments and head off any problems There are many advantages to student credit cards (buyer protection, online purchase ability) but they must be weighed against credit readiness. If you want a credit card for emergencies, but have concerns about student credit card debt you likely won't have funds available when an emergency arises. If an honest assessment reveals that you are not ready, hold off a year of two until you are. The time you wait may mean the difference between sleepless nights and endless calls from bill collectors or owning a home with a great interest rate and lower monthly payments than you could get with damaged credit.