By Kelley Kepler
Catholic Herald
Credit cards: Some students learn the hard way
SUPERIOR -- When they first arrive on campus, college freshmen have many thoughts and concerns on their minds as they move into their dorm room and get ready for classes to start.
Unfortunately for some, responsible credit card use may not be one of them, said Jody Anderson, director of the financial counseling program run by Lutheran Social Services in Duluth, Minn.
"Students get credit card offers the minute they get onto campus," she said, whether it be in the form of pre-approved offers in their mailboxes, advertisements tucked neatly inside the bags they bring back from the bookstore, or credit card representatives stationed in high traffic areas on campus with free T-shirts for any student who fills out an application.
According to Anderson, parents cannot assume their children will automatically know how to use a credit card responsibly. Rather, "There needs to be a lot of frank conversation before students leave home. They should have experience managing money and balancing a checkbook, and they should have complete understanding of how credit cards work before they go off to school," she said.
Otherwise, students may end up with more credit cards than they can handle, more temptation to take out their plastic at stores and more debt than they can afford to pay off.
Nellie Mae, one of the nation's largest provider of school loans, conducted a 2002 study on the credit card usage among college students. The study found that by the time college students reach their sophomore year, 94 percent have at least one credit card; the average student has three. The study also determined that college students in the Midwest carry the highest average credit card debt of students nationwide.
Jim Guenther is the president of Economics Wisconsin, the state council for economic and financial education. He estimates that the average college student in Wisconsin graduates with $2,800 in non-school related credit card debt. Twenty percent of graduates owe $10,000 or more in non-school related debt.
"This money has not gone toward books and tuition, but to things like beer and pizza," he said.
Guenther said college students are a favorite target of credit card companies because the first credit card one takes out is generally the one he or she uses the most and keeps the longest. Each credit card company wants to be the first one to reach new college students.
And this competition doesn't only apply to college students, he said. Credit card companies are increasingly marketing to high school students as well.
"I'm not against credit cards," Guenther said, suggesting that young people should establish credit -- if they know how to use it properly.
"Somebody has to tell the kids that if they have a credit card, they should not use it if they can't pay the balance off every month. Many kids don't understand how long it will take to pay their bills if they only make the minimum payment each month," he said.
The problem, he said, is that many students are not learning this.
Parents cannot assume their children will obtain financial instruction at school, and they should educate their children about credit cards before they leave for the real world, he said.
As president of Economics Wisconsin, Guenther focuses on educating K-12 teachers in the state so that they can address financial issues in the classroom.
Seventy-three percent of teachers who graduated from the University of Wisconsin system with a social studies major have never taken an economics class. That statistic grows much higher when looking at teachers who majored in other humanities subjects, Guenther said. Furthermore, only 15 percent of high schools statewide require students to fulfill an economics or financial literacy requirement.
A 1999 Youth and Money survey found that 94 percent of youth cite their parents as the primary source of financial education. And youth tend to follow the financial example that their parents set. However, 30 percent of youth report that their parents do not discuss savings and investing with them, while 47 percent say their parents don't discuss household budgeting with them.
Anderson suggests students pay their credit card bills on time every month to avoid hefty late fees, pay the balance off as quickly as possible and only have as many credit cards as they need.
She said young people should resist the temptation to sign up for credit cards just to get freebies or an extra 10 percent off at a department store. Some of these cards will have high annual fees. Plus, the more credit cards people have, the more risk they present to a credit grantor who assumes there is a balance on all of the cards, she said.
Bad credit habits can do more than harm students' credit history and make it difficult for them to obtain loans in the future.
In a 2001 University of Minnesota study, researchers from Boynton Health Service surveyed 550 students at the university. The study found that:
* Students with high credit card debt were three times as likely to use tobacco and more likely to drink alcohol than those with little or no debt.
* Those with high amounts of debt are more likely to suffer from depression.
* Students' grades decline as their credit card debt increases.
Students carrying excessive amounts of debts are under high levels of stress, and they find their grades suffering because they need to work more to pay off the debt. And, they end up isolating themselves because they have no time for anything other than class or work, Anderson said.
In fact, she often counsels young people who have had to drop out of college because they incurred more debt than they could pay off. In some extreme cases, young people even end up filing for bankruptcy, she said.
More and more colleges are taking action to prevent students from getting into problems with their credit.
For instance, the University of Minnesota, Marquette University in Milwaukee and the University of St. Thomas in St. Paul, Minn., prohibit credit card companies from soliciting to students on campus.
In addition, as of Sept. 1, the University of St. Thomas will no longer accept tuition payments on credit cards. According to Pat Sirek, in the university's media relations office, this decision will benefit both students and the university. Students will not be allowed to incur credit card debt to pay for their tuition, and the university will save about $500,000 a year in credit card fees.
A debt management group that once existed on campus also published a debt management brochure that the university makes available at the financial aid and business offices.
Sirek said the debt management group disbanded because credit card use among
students had decreased, and student surveys showed it was not a pressing concern for the university's students.
She said the University of St. Thomas also has an emergency student loan program that students can take advantage of if they ever find themselves in a sudden financial emergency.
For many college students, just knowing how long it will take to pay off a charge and how much interest they will accrue may be enough for them to reconsider a large purchase, Anderson said.
On Lutheran Social Services financial counseling Web site, www.lssmn.org/debt, there is calculator that people can use to determine the total finance charge on the debt.
And as a rule of thumb, said Anderson: "If you can't afford to make your payments, take your credit cards out of your wallet, and don't carry them with you."
Top 10 credit card tips
1. Remember that credit cards are just like a loan -- you have to repay what you borrow.
2. Pay your bills on time. This will help your credit rating and eliminate costly late fees.
3. Pay your bills in full if possible. This will eliminate finance charges.
4. Always pay more than the minimum payment. If you don't, it will take forever to get caught up on your bills, and you will pay a lot of money in finance charges.
5. Reduce your reliance on credit. When you do use credit, keep track of how much you spend. Remember that impulse purchases add up fast.
6. Save your receipts. Then you can compare your receipts to your monthly bill and promptly report any problems.
7. Never lend your credit card or debit card to anyone. Don't share your PIN numbers either. You could just be setting yourself up for fraud.
8. Set a budget and stick to it so you don't end up owing more than you can afford. This could damage your credit rating. A negative credit rating can make it harder to finance a car, rent an apartment, buy a house or even get a job.
9. Once a year check out your credit report. Make sure it accurately reflects your financial situation, and check for potential fraud.
10. If you are overwhelmed by credit debt, seek help. Don't delay. Facing up to your financial problems will help you begin solving them.
Source: Minnesota Attorney General's Office
Some important factors to ponder before going plastic
Before deciding whether or not to get a credit card, students and other consumers should consider several factors:
* Annual fees: Many companies charge an annual membership fee. These fees vary, ranging from $15 to $75 or more. Remember that not all cards charge an annual fee.
* Annual Percentage Rate: The APR is the percent of interest paid as a cost of credit and is expressed as a yearly rate. It is disclosed when opening an account and is noted on each bill received by the cardholder. The financial institution issuing a card also must disclose the "periodic rate," which shows how the company figures the interest rate for each billing period. Look for a card with a low APR, and make sure bills are paid on time, or the APR may go up as a penalty. A low APR combined with a low account balance creates lower monthly payments. Be aware that some credit cards start out with a low introductory APR, but after a short period substantially increase the APR.
* Grace period: This is also called a "free period" because it allows cardholders to avoid finance charges completely by paying the entire balance in full before the "due date" shown on the bill. If a credit card plan allows a grace period, the cardholder must mail the bill at least 14 days before the payment is due so that there is enough time to make a payment. Remember, if there is an outstanding balance from one month to the next, there may be no grace period.
* Transaction fees and other charges: Credit card issuers may charge fees for late payments or going over the card's credit limit. Additionally, there may be a transaction charge for cash advances.
Source: Minnesota Attorney General's Office
© Superior Catholic Herald, 2003