College student credit card use can leave them drowning in debt

Personal 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.

Prerequisites: 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 fast.

"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 drinks."

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.

A Nellie 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 is three.
• 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 card debt.
  

"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 best.

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 have."

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.