Avoid the Credit Card Trap

By Matthew S. Scott

It's no longer a question whether or not college students should have credit cards. For most students, managing credit cards and dealing with credit card debt is part of the college experience, but that experience isn't always a smooth one.

College financial aid provider Nellie Mae reported that 76 percent of undergraduate students had credit cards in 2005, with an average balance of $2,169. An alarming  25 percent of undergraduates had credit card balances totaling $3,000 or more. Handling payments on $2,000 worth of debt when you don't yet have a job and are accumulating tens of thousands of dollars in student loans is a scenario that could seriously damage a student's credit rating.

Rhonda Reynolds racked up $8,000 worth of debt on an American Express card while attending New York's Baruch College. Necessities like a laptop computer for school combined with a penchant for clothes shopping and expensive meals left Reynolds unable to make the minimum payments from her part-time drugstore worker's salary.

"My parents made sure I had a credit card because they didn't want men buying me things," says the petite Manhattan beauty. "I was paying my bills with money I earned from my job and a stipend from an internship until I realized I had been too irresponsible with the card."

Reynolds' account went into collections just prior to graduation before she reluctantly turned to her parents, who paid off her debt. "I unnecessarily ruined my credit and I'm still paying for it," she says, adding, "If I applied for a credit card now, I will not get the limit I should have based on my age and net worth."

While what happened to Reynolds was bad, things could be worse. The suicide deaths of the Janne O'Donnell's and Trisha James' children, who both racked up thousands in credit card debt while in college, are discussed in Maxed Out, a recently released documentary about credit card debt by director James Scurlock.

College students need to understand everything they can about managing credit cards and credit card debt before it becomes a life or death situation. As you use credit cards and establish other debt, like car payments and a mortgage, you create a credit profile, which the credit reporting agencies use to calculate your credit score. Your credit score is your economic report card to the rest of the world – it tells people what type of financial risk you are, and is used to determine the interest rates you pay for many forms of credit and insurance. Simply put, pay your bills on time and you'll save money on interest payments and you'll be extended larger amounts of credit debt and loans. Pay bills late, and you'll have less credit extended to you and pay higher interest rate fees.

Students should also know that employers look at credit scores to determine how responsible a person you are, so it's important that your credit profile is not destroyed before you leave college. Most college credit cards offer interest rates between 17 percent and 19 percent, so obligations on two or more credit cards can balloon out of control quickly. A college student paying $40 monthly on a credit card balance of $2,000 with an interest rate of 19 percent will incur $1,994 in interest charges and take 100 months to pay it off.

Instead of worrying about paying off such debt, college students should make sure they don't create it in the first place. Here are some keys to managing credit cards in your college years:

No income, no cards – If you don't have a job or other source of regular income, you should  delay getting and using your credit cards. With no income, you can't make payments, and all missed payments count as a blemish on your credit record, no matter how small the amount, or how much of a "legitimate emergency" your purchase was. Your payment record is what matters most, so keep it spotless.

Use credit cards for emergencies, not wants

Credit cards are best used for purchasing things you expect to receive a return on over time. Under certain circumstances, books and computers qualify; groceries and entertainment do not.

Use only one card in college

Juggling two or more credit card payments on a limited budget is expensive and irresponsible. The fewer cards you have, the less temptation to create more debt.

Pay on time and pay it off

Paying your bills on time is the only way to establish a sterling credit rating. Send your check a week in advance or use online banking which can usually make the payment same day. Nellie Mae reported that only 21 percent of college students pay their credit cards off every month. Strive to be in that group.

Don't use cash advances

Cash advances charge higher interest rates than regular card purchases. You want to limit your debt, not accelerate it.

Establish good financial habits

Learn to save first and to spend your money wisely. Use cash for purchases whenever possible, and establish a sound budget and stick to it. A little self-discipline in college now can help you afford a car, home and comfortable lifestyle much sooner after graduation.

Managing your credit and credit cards is an ongoing process. Start by obtaining your free credit report at AnnualCredit-Report.com. Then start extending your knowledge about credit and credit management by visiting websites StudentMarket.com(www.studentmarket.com/ student-credit-101.html) and Credit.com (www.credit.com/credit_information/credit101/). You can also go to LowCards.com (www.lowcards.com/studentcards.asp) and find a listing of student credit cards to choose from. Remember your credit report and credit score tell people a great deal about your character before you even show up. Make sure they tell a story that helps you reach your financial goals.

Matthew Scott is a former personal finance editor of Black Enterprise Magazine, and is currently a financial reporter for Crain's Financial Week.