The Credit Card Conundrum

A generation ago, few college students had their own credit card. In 1998, 67 percent of students came to school with a card. And now, at least 75 percent of college students have that piece of plastic in their pockets. The “spend now, pay much later” temptation associated with credit cards is causing many students to get in over their heads. According to the Nellie Mae Corporation, 91 percent of students own at least one credit card by their senior year, with an average balance of $2,850.

You can help your student steer clear of debilitating credit issues by increasing your own awareness. Here are a few of the lesser-known issues involved with student credit cards:

• Universal Default. Some companies alter cardholders’ rates when their credit scores change. So, if a student misses a payment or two, his credit score can go down significantly. Then, if he has two credit cards, paying one faithfully but missing a payment on the other, universal default kicks in, raising the interest rate on both cards to 30 percent.
• Too-high credit lines. When a college student can access a $10,000 line of credit, the potential for problems of living beyond her means is high.
• A lack of information. Students can have a difficult time understanding the terminology and the mathematics of credit.
• A culture of debt. When students have immediate needs, such as gas, food or books, they can easily get in the habit of charging these purchases. This can become a cycle as the debt increases, leading to more charges just to make ends meet.

How Parents Can Help

• Share the dangers of paying on a card and collecting from friends. It’s a common practice among students: one will put the whole dinner on his credit card and friends will reimburse him with cash. This money, intended to pay the bill, can easily disappear, however, leaving your student with a large credit charge and no way to pay it.
• Explain the “Grace Period.” A credit card statement may tout a 15-25 day “grace period” to pay your bill. However, this may only apply if students don’t have a previous balance on their account. If they do have a balance, chances are that they’ll be paying interest on their new purchases right away.
• Encourage students to pay up each month. Paying off credit card balances avoids interest accumulation while helping students prove to creditors that they are a good credit risk. An active, paid-up account will make it easier for students to negotiate with loan officers in the future.
• Talk about the practice of “living off your credit card.” It may seem convenient for students to use their credit card for everything but the benefit of cash is that it is much easier to keep accurate tabs on spending. Credit card purchases often don’t show up on a printed bill for a month and by then, students may have gotten themselves into trouble.
• Warn them to put the charge card down and step away from the mall. Recreational shopping is a pastime for many students. Encourage them to know their limits so that peer pressure and impulse buying don’t lead to poor money decisions.
• Ease into it. Encourage your student to start with a low credit limit to avoid temptation. Make the card for emergencies only. His future credit card usage will probably be more prudent as a result.
• Start the practice of paying on time. Your student can avoid late fees by paying on time. Encourage her to pay her bill as soon as it arrives so that it is not lost in the shuffle of her busy life. Making mistakes in this arena can be hard to rectify.
• Don’t go overboard. Just because someone offers your student a credit card with low introductory rates doesn’t mean he has to apply for it. Too many cards can get confusing and students are bound to have a tough time keeping track of what they’ve actually spent. One card is enough.

In addition, parents can set up to receive duplicate statements or monitor their students’ account online if they want to help them stay on track with credit cards.

College should be a time for students to learn how to manage their money, expenses and credit so they leave prepared to handle their finances in the "real world." Help them learn good financial habits now so they have a clean start, not one clouded in debt and poor credit.

Donna Krivoski
Director, Parent Relations
(610) 330-5035
krivoskd@lafayette.edu