Protect Your Credit Rating – It Can Impact Your Future!

By Dennis Kimbro, Ph.D.

Picture yourself in the not-too-distant future.  After years of toiling away in libraries and lecture halls – the moment has arrived.  You are finally gearing up for your college graduation.  As you stroll across the stage before family and friends, you’re leaving college with an abundance of knowledge and skills, a prestigious degree, key contacts and relationships, and an enormous amount of credit card debt? Unfortunately, this is the case for far too many college graduates.

My middle daughter can picture the above scenario all too clearly.  Though the following chain of events occurred more than 10 years ago, she can recall the experience as if it transpired yesterday.  It was winter break during her junior year.  As she capped off a 12-hour drive from Norman, Okla. and pulled up to our Atlanta, Ga. home, she was shaking in her boots.  Not because of poor grades or a fight with her roommate.  Blessed with a pleasing disposition, she had never caused us, her parents, an ounce of trouble.  Everyone seemed to be her friend.  And she had always been an excellent student – more than equal to the task.  As her mother has shared on more than one occasion, it seems as if this child could add before she could read.  To drive the point home, she was labeled by her college buddies and fellow business majors as a "quant-jock."  When other students cowered in fear at the prospects of statistics and upper division economic theory, she found safe haven in numbers and mathematical formulas buried in reams of data.  But now the tables were turned and we knew why.  Thanks to the constant barrage of creditors who bombarded our phone lines when she failed to respond to their messages, we knew our child was bringing home much more than a semester’s worth of dirty laundry.  Stuffed in among her tattered luggage, duffle bags, and back pack, was nearly $4,000 of credit card debt.

"Her first thought?  How am I going to get out of this and not tell my parents?" recounts this wiser and now financially disciplined college grad.  She now shops with cash and not plastic in order to know exactly how much she can spend. 

"Looking back, so many of my friends were trapped in a web of robbing Peter to pay Paul," says Kimberli Kimbro. "Or worse, paying no one at all just because of credit cards.  I vowed that I would never fall prey to the lure of the latest fashions or the hottest electronic gadgets and all-night parties.  But to be honest, I stumbled into the same trap.  Wherever I turned on campus–from the bookstore, to the coffee shop, or walking to the parking deck – somebody was waiving a credit card application under my nose.  I discovered that there’s a huge gap between what I want and what I need." 

At one time, the biggest worries a parent could face when they packed their teenager off to college were sex, drugs, and endless drinking.  However, in the past decade, another issue has been added to that list: avoiding the credit card trap.  Though my daughter eventually leaned on us, her parents, for financial and emotional support, we still required her to bite the bullet and drop out spring semester to pay down her debts.  Thankfully, she honored her commitments and still marched with her class.  For many college students, a credit card is viewed as a rite of passage – a chance to not only express newfound independence but to spend without permission or thinking.  Sadly, this small piece of plastic can also lead to economic ruin that can haunt you long after graduation.

Case and point:  Even with all of her mathematical prowess, my daughter still had difficulty calculating the one problem that could impact her entire life.  While credit cards have become a fact of life on college campuses, thousands of students are learning their lessons the hard way.  When it comes to credit and personal finances, increasingly, more Black college students are stumbling into serious debt that has little to do with the cost of their education and more to do with their lifestyle.

What’s in Your Wallet?

Gone are the days of the stereotypical "starving student."  Surprisingly, some students arrive on campus with credit card in hand and, according to a recent study, "have no idea what interest rate they are paying."  Teenagers heading to campus today expect to continue to enjoy the same lifestyle they had when mom and dad were footing the bills.  To compound matters, most are blissfully naive regarding how the world of credit operates.  From industry leader Bank of America to Capital One, every financial institution has long been aware that if they open an account for a college student, that individual is likely to remain a loyal customer for many years after graduation. 

The irony is that many students are obtaining their first credit cards – which often lead to financial trouble – with the help of their beloved college.  In a 1998 survey, one out of four students who applied for credit said they were solicited either directly by a campus representative or a school-related ad.  This raises the question: Why are credit card applications included in freshman orientation packets?  And, how are students able to sign up for immediate, pre-approved lines of credit right on the quad or oval?

Consolidated Credit Counseling Services, a national non-profit boasting 50 years experience in money management, reports that 20 percent of freshmen obtained their first credit cards while still in high school, and approximately 93 percent of college seniors have acquired at least one card during their college years.  Many campus credit card vendors make applying for a $10,000 credit line as easy as purchasing a lottery ticket or filling out a sweepstakes entry – and just as attractive.

With a slew of on-campus promotions utilizing marketing tactics ranging from magazines to web sites, who can say no?  And don’t forget the low introductory rates and appealing incentives – t-shirts to bonus airline miles – it’s not surprising to discover hat according to Nellie Mae, the college loan behemoth, 83 percent of all college undergraduates tote at least one credit card – a 24 percent increase since 1998 – and carry an average balance of roughly $2,700.  That’s on top of an average student loan balance of $19,400 – but more than $30,000 for African American graduates!

Nellie Mae has conducted a string of credit card studies since 1998, and the patterns of behavior related to credit card usage among lower income undergraduates, particularly minority students, reveals a host of disturbing trends:

• Three out of five students with credit cards maxed them out during their freshman year.

• Three out of five freshmen with multiple credit cards used bank cards to pay for other revolving credit accounts.

• 47 percent of undergraduates own four or more credit cards.

• 10 percent of all seniors face more than $7,000 of credit card debt upon graduation.

• Financial burdens can often lead to academic problems.  Credit card debt is linked to low retention rates among African-American undergrads, as students quit school to work full-time.

• Nearly three-fourths of students use their students loans to pay credit card bills.

Young, Black and Broke

The learning curve with credit cards remains steep, and there’s little room for trial and error.  Most college students don’t know how to balance a checkbook, much less manage their credit.  Little do they know that by making the minimum payment on their $2,700 balance, they won’t retire that debt for 15 years.  Given the current entry-level job market, chances are this excess debt is more than most students will be able to repay.  It’s no coincidence that bankruptcies among consumers age 25 and under has soared.  As today’s students take on more debt, due in part to higher tuition and endless credit solicitations, this new class of spenders has been labeled "Credit Card Nation" and "Generation Debt."

Black collegians are often faced with a major decision, one that has little to do with their field of study.  According to the Federal Reserve, Blacks are denied credit more often than whites and typically pay higher interest rates (in excess of 18 percent).   As I prepared to pen this article I sat down with a host of upperclassmen and women–students who attend Atlanta University Center schools – and addressed the touchy subject of credit.  Below are a few choice words from soon-to-be May 2008 graduates: 

"Between my student loans–totaling $70,000, and two VISA cards that are maxed out – bankruptcy looks like my only option.  I never took finances seriously until my loans began to accumulate."

"Spring break in Miami?  I knew I couldn’t afford to go but everyone was going to be there.  That was my sophomore year.  I’m still digging out.  What was I thinking?"

"I’m a senior and I can tell you that it’s not worth the hassle.  When I arrived in Atlanta, I fell in love with Neiman Marcus and Nordstrom’s.  Three credit cards later...  Please, don’t ask what I owe.  It’s so easy to swipe a card and get what you want.  From now on I’ll just go window shopping.  Did I mention that someone hit my car"

"I was $3,000 in debt before I could legally drink.  I’m interviewing now.  I just hope and pray my future employer doesn’t request a credit check."

Passing with Flying Colors

College is the last care free bastion before real life seeps in, or at least it should be.  As a professor who interacts with Black students on a daily basis, I’ve been led to believe that at the close of each day students should be able to rest their weary heads with no more on their minds than tomorrow’s class assignments or calculus exam.

Students should be able to live at peace, even if they can’t afford much more than an occasional late night whopper or pizza. At the very least they should not be forced to fret about overdue bills from impulse spending. Unfortunately, for many Black students this is not the case.  Many are already over-burdened with financial obligations and saddled with credit card debt and interest rates that are spinning out of control. As I think about my daughter and the challenges that were thrust upon her shoulders, I admit, I was overly naive.  I could’ve used a pre-emptive strike.  The issue of young adults obtaining credit is, quite frankly, a lot like sex: Most are going to do it.  As a parent or guardian, you want to be sure your child or loved one does it responsibly and safely. The following pointers will help any college student master the ABCs of credit and ace one of college’s toughest exams.

How to Use Credit Wisely

A.  Apply for low-limit credit cards. Many banks offer credit cards that feature built in spending limits, such as $500 or even $250, which makes repayments easier and helps to control spending.       
 
B.  Be responsible. Debt isn’t the problem; your buying decisions are.  If you do get a credit card, pay the bill on time. Financial counselors say the answer to student debt is not avoiding credit altogether.  Establishing and building a healthy credit history can open doors in the future.  Paying student loans and credit cards on time is a surefire way to let future lenders know that you stand by your commitments.  Most financial planners encourage clients to strive for a credit score of 760 to 850, which almost guarantees an easier path to financial stability. Remember, upon graduation your credit rating is just as important as your GPA.

C.  Compare credit card offers.  Choose a card that has an annual percentage rate.  If you own other cards and find a lower rate, try moving higher credit-card debt to the card with the lower rate, and pay off the balance.  Consider the following elements when selecting a card:  finance charges, annual and penalty fees, and ending balance calculations.
 
D.  Do use a debit card. These funds are pulled from a checking or savings account and buffers any temptation to overspend. Many parents set up accounts and manage their child’s spending accordingly.

Dennis Kimbro, Ph.D., is a faculty member at the Clark Atlanta University School of Business Administration.  He is currently writing his fifth book, "Have vs Have Not: What Black Millionaires Know that Others Do Not."