College student credit card use
can leave them drowning in debt
Finance 101: How to have big money problems before you graduate.
This course is designed to prepare students for years of digging
out from under large amounts of debt compounded by absurd credit
card interest rates. Topics include acquisitions, cash flow, consolidations
and debt-paying abilities.
The urge to spend and pay for it with a credit card.
Craig of Fort Worth, Texas, who prefers that
we not reveal his last name, had the prerequisites for that course.
Craig didn't even have a MasterCard or Visa when he entered college
-- just a department store card and a gas card. But he caught on
"By sophomore year I probably had two or three
cards -- every year I'd add on a couple more. I'd get the new cards
for their low interest rates for six months and I'd combine the
debt on the new card. I used the cards for books ... screwing off.
We could drink, so we'd go out, hit the clubs, and I'd buy my friends
Car repair bills escalate
Craig estimates he had $14,000 in credit
card debt when he graduated in 1996. He landed a good job at an
engineering company and decided he needed a cool-looking sports
car. "I bought a used car and had it for a year and a half. It was
nothing but trouble. Every time I put it in the shop I paid the
bill with a credit card. A year and a half after graduation my credit
card debt was $24,000."
Craig estimates he was paying $600 a month in
credit card bills and barely touching the principal. One credit
card claimed he made a late payment and pushed his interest rate
to 27.99 percent. It increased his debt so rapidly that it was the
straw that broke Craig's back.
Unfortunately, Craig's story will be repeated
thousands of times this coming school year.
Mae survey of undergrads in 2000 reveals some disturbing numbers.
- 78 percent of college undergraduates have
at least one credit card.
- Average number of credit cards per student
- Average credit card debt per student is $2,748.
- Thirteen percent have credit card debt between
$3,000 and $7,000.
- Nine percent have more than $7,000 in credit
"The mentality is, 'I need books, or I'm going
out with friends'," says Kevin Williams of Consumer Credit Counseling
Service of Fort Worth. " 'The credit card lets me do that and I
don't have to worry about the bill until next month'."
Companies help students
descend into debt
Students aren't alone in their effort
to develop bad spending habits. There are plenty of companies willing
to aid and abet. College kids, who have no visible means of support,
are handed credit cards by companies that figure Mom and Dad will
bail out the kid if necessary. Then, there are so-called "student"
credit cards such as GTE Visa, which promises a 5 percent rebate
on purchases as long as the student keeps a revolving balance at
21.4 percent. How's that for teaching a kid personal finance?
Parents may not like this, but Kevin Williams
says kids' credit problems start at home.
"Many parents don't discuss financial matters
with their kids," he says. "They say the money isn't available but
they don't say why. The kid grows up and says, 'OK, we don't have
money, but I can now get something when I don't have the cash.'
They don't put the two together and see that a credit card is a
debt that has to be repaid. It's renting money."
It doesn't help that we live in a society that
targets students for ridiculously expensive jeans, athletic shoes
and the like. And, as Williams points out, no one wants to admit
they can't afford something. Every parent wants to give their kid
The stores and credit card companies reap the
benefits of our misguided ways.
"The vast mentality is, 'I'm not having a problem
making the minimum payment so the amount of debt isn't an issue',"
says Williams. "But a downturn in the economy, a job loss or loss
of income, and the light goes on and they see how much debt they
Take charge of spending
How can students and parents make sure they're not facing a $14,000
credit card bill at graduation? Get a tight grip on spending. Set
up rules for what the card is for and what it's not for. Maybe it's
OK to put car repairs on the card or school books, but it's not
OK to buy CDs, dinners, drinks or clothes with it. Just because
your kids are going off to college doesn't mean they know how to
handle money. Set the rules and make them stick.
It's probably best to allow your child just
one credit card -- that at least limits the amount of damage he
or she can do. Pick the card wisely. Use the Bankrate.com
survey of student credit cards as a guide. You may also see
offers from places such as College
Parents of America Card Program. That program in essence lets
you control your child's spending by setting up a pre-paid debit
card or credit card. Be careful -- there are plenty of fees. For
the debit card there's a membership fee, setup fee, $3 for each
money reload, 75 cents for each ATM withdrawal on top of bank fees,
and more. The credit card comes with a membership fee, an intro
rate of 5.9 percent that jumps to prime plus 16.4 percent (currently
17.4) after six months, a fee for cash advances, a late payment
fee and a maintenance fee if the card is used less than six times
in a 12-month period. Read the fine print.
Williams also suggests sitting down with your
college-bound children and talking to them about money. Explain
credit, how it works, what it costs.
Craig from Fort Worth says he'll be debt free
in five months. He has just one credit card and pays it off each
month. Lesson learned.