By Lois Center-Shabazz
You work hard, sacrifice, and send your child off to college to get a quality higher education, and he/she returns with thousands of dollars in credit card debt. In some cases the credit card debt is far in excess of their educational costs. How could this happen in the American college system?
When my niece moved to our town to go to college she gave her university our home as her permanent address. This gave me a wonderful opportunity to experience something I had little knowledge about. Over the course of several months I received dozens of calls a week from credit card companies offering my niece her own credit card. I was shocked! Not only were credit card companies trying to give my unemployed college student niece her very own credit card, there were at least five of them forcing their credit on her. All she had to do is say yes over the phone. When she did not return their calls, because I did not deliver their messages, for obvious reasons, they started sending her credit card offers by mail. The interest rate was a whooping 24% on most of them. They placed it boldly on the front of the offer as though that were something good. Then I figured out why, to a college student, that was something good, since it represented what they consider free credit. Free credit meaning, offers without a job and without requesting it. My niece never saw the offers; I do not deliver vile or cryptic messages of any type.
I received a priceless education. In the past, credit card companies set up a table at the university and paid college age kids, who were not in college, to sell their college credit cards. When popular talk shows covered stories of college students graduating and filing bankruptcy on credit card balances as high as $50,000 the college campus tables disappeared. Later on, the companies obtained phone numbers and mailing list of the college students. My niece was only a freshman when they started recruiting her into a life of hopeless debt. I wonder how they got her number? It made me furious to think that universities are selling the mailing list of their students, but what other way could all of those companies have gotten her information.
Credit card companies are constantly looking for new ways to expand their business. The debt industry is one of the most profitable industries in this country. Every time you charge an item on a credit card and subsequently pay interest month after month, you are helping the debt industry and hindering your ability to purchase items at or below market rates. Or, put another way, you are paying more, and more, and more for an item every time you pay another monthly interest charge. Teach your child not to fall into this credit card trap before he/she enters college. Here are some things you can tell them.
1. The average college credit card interest rate is far in excess of the average credit card rate for working adults.
A common college credit card interest rate is almost 24%, a credit card rate for working adults averages about 14%. A wiser use of your money would be to save or invest it. Use the Credit Card Calculator at MsFinancialSavvy.com to figure out how much money you would save if you invested your credit card interest.
2. College credit card penalties on monthly late payments and/or going over-the-limit can be excessive.
The credit card companies can charge a penalty fee if you are late with a payment and another penalty fee if you go over your limit. College credit card late fees can run 3-4 times higher than those for working adults. One college student told me her monthly payment went from $30 a month to $300 a month, after late payment and over-the-limit penalties were applied.
3. Credit card use encourages many college students to purchase items they don’t really need, tossing a credit card on the counter makes purchasing seem easier then using cash.
Don’t be fooled by the ease of tossing a credit card on a counter. When the bills arrive in the mail that ease quickly turns into difficulty, as you have to sift through your checking account to find money for the balance or monthly payment.
4. Credit cards charge interest on top of interest.
One reason why you end up paying far in excess for an item when you charge with your credit card rather than paying for it with cash, is because of compounded interest. When you carry your balance from month to month, you will pay interest on the current months balance, every month. To avoid paying compounded interest every month, only charge what you can pay off each month.
5. Credit card balances skyrocket quickly when you don’t decide the purchases you will make in advance, and stick to them.
If you feel you must have a credit card, dont take your credit card everywhere you go, so your use will be kept to a minimum. Credit cards should be used sparingly. If you want to go on a vacation, save up the money or borrow it from your parents. If you need new clothes, save up the money, and buy them when you have cash.
6. You will have a tendency to spend more if you have more credit at your disposal.
If you own only one credit card at a time, rather than say two or three, you will have a tendency to purchase a lot less. If you purchase up to the limit on your credit card, discipline yourself to pay it off, or at least pay down the balance, until you use it again. But, whatever you do, do not get another credit card so you will not have the tendency to acquire more debt. If you have to charge occasionally, put away the credit card and try to pay off the balance before you use it again.
7. College credit cards can ruin your credit for years to come.
It is important that if you obtain a college credit card, you handle it responsibly. After graduation you will need a job, a car, and after a few years, you may consider purchasing a new home. To do all of these things you will need a good credit history. Many employers will obtain a credit history on new employees. Employers want to hire honest employees, and to them, paying your bills on time is one factor that indicates honesty.
Summary: So, here you have it, there are many ways a credit card balance can balloon out of control rapidly. If you get into trouble with a credit card, don’t stress yourself out, we all make mistakes. If you are a young adult reading this, talk to your parents or some other trusted adult, they can help you work through it. Parents talk to your kids about college credit cards before they go off to college to avoid costly mistakes after they start college.
Dr. Lois Center-Shabazz is the author of the award-winning book Lets Get Financial Savvy! From Debt-Free to Investing With Ease ISBN #0971979502, and the founder of the critically acclaimed personal finance website, www.MsFinancialSavvy.com. She is also available for interviews and to speak to your organization.