A quick swipe of the plastic and sign on the dotted line—it’s so easy to pay with credit cards. However, as many college students have discovered, the consequences for using credit so loosely can be devastating.
In an effort to combat credit card myths and misunderstandings, Congress passed the Credit Card Accountability, Responsibility and Disclosure Act earlier this year.
The law aims to protect young adults, especially college students, by requiring persons under the age of 21 to have a co-signer who is over 21. Also under the law, credit card companies are not allowed to offer prizes for applying for a card.
Even with the new law, credit cards can still play friend and foe to students on college campuses, according to Ron Hatfield, West Virginia University Extension Service financial management specialist.
Hatfield said the best way to prevent credit card debt is to understand what the cardholder is getting into. He recommends knowing the terms, conditions and best practices to follow before applying for a card.
Using a credit card gives a person the ability to purchase an item today and pay for it over time. To obtain credit, people must be able to show they can make payments on time and over a period of time.
“In today’s financial environment, credit rating is essential when one needs to buy housing, utilities, auto insurance and more,” Hatfield said. “Think about the purchases you might want to make after college. New cars and homes are often high on the wish list and most people are going to need a history of good credit to make these purchases.”
Hatfield said the solution isn’t as simple as never applying for or using a credit card.
“With absolutely no history of payments ever made, it’s hard to get a loan for something like a car or house,” he said. “It’s important to start building good credit to ensure a high credit rating.”
Two major terms are important to credit ratings—credit scores and interest rates. The two have a strong correlation.
“Good” credit scores range upwards from 700 and above. Below 700 is average, but once hitting 600 and under will cost you money out-of-pocket, Hatfield said.
“Any credit score below 600 will jack up your interest rates,” he said. “Lower credit scores usually mean higher interest rates for cardholders.”
Jackie Goff, housing director counselor from Consumer Credit Counseling, said an average interest rate is around 9.9 percent of the total purchase price. Goff said when you get above roughly 10 percent you’re paying too much in interest.
According to Goff, the worst type of credit card to have is one associated with a retail store. Stores often offer a one-time discount incentive to open a card. Due to their discount, the cards tend to be popular among college students, but they can pack interest rates around 21 percent.
Hatfield said that credit card companies were known to target college students in the past due to the notion that these students would soon be graduating and making money, or could be bailed out of debt by their parents. But, Hatfield warns that in many cases, neither is true.
“Being away from mom and dad – this is a college student’s first taste of independence. Credit card companies prey on that,” Hatfield said.
Hatfield said that college students with credit cards find themselves in some trouble with “out-of-sight, out-of-mind” mentality. If they aren’t actually handing over real cash, they can just worry about the expense later, he said.
This, along with their lack of income, leads to students to over-extend themselves in the financial department, which is causing a disturbing trend—the college dropout rate becoming financially based, according to Hatfield.
Even with this new law and with the help of a co-signer, students will still get their credit cards. But before signing up for a credit card, students must remember to ask questions to get all of the facts.
“My best advice is to read before you sign on the dotted line,” Goff said. “Don’t assume anything; there are always stipulations and you can’t claim ignorance down the road. When you sign your name, it’s saying you understand how this works.”
And after these students become credit cardholders, they should begin following best practices. This includes paying more than the minimum amount required and paying the bill on time each month, even if there is a grace period.
“Depending on a grace period is not a good idea,” Goff said. “If you get in the habit of that, you’re getting off on the wrong foot.”
Students must also watch what they buy with their credit cards. Everyday expenses like groceries or clothes aren’t items that should be bought on credit.
“When you’re using a credit card, ask yourself if you would you go into a bank and take out a loan to pay for the item,” Goff said. “This is essentially what your credit card company is doing—lending you money to pay for your purchase.
Hatfield’s advice is to limit your spending to what you know you can pay off every month.”
If students must get a credit card, both Goff and Hatfield agreed that secured credit cards are a smart idea.
A secured credit card allows cardholders a limited amount on the card to avoid running up large amounts of unmanageable debt. Both experts noted that just because it is a secured card, doesn’t mean people can be lax with their payments.
Parents can help their children make wise decisions about credit cards by leading by example—living on a budget and letting their children know at a young age how finances work.
“Good financial management is 80 percent behavior and 20 percent knowledge,” Hatfield said. “The earlier we start educating our children on how to practice these methods, the less likely they are to accumulate debt.”
For those college students who are already in trouble with credit card debt, there is a way out. Hatfield said it involves a written plan with a budget and discipline.
He recommends taking the lowest amount of debt and wiping it out fast and first before moving on to the higher amounts.
“It may take some time,” he said. “But debt isn’t something that disappears overnight. Be patient and proactive.”
For more information on financial management or other WVU Extension Service Families and Health programs, visit www.ext.wvu.edu, or contact your local county office of the WVU Extension Service.
WVU Extension Service