Back to School Credit Cards....BEWARE!

Another summer has come and gone. This time of year finds many young people leaving home, either again, or for the first time, and heading off to various institutions of higher learning. While this is a very exciting time, it is also a prime time to for students to learn some lessons in financial responsibility. Lessons that can hopefully be learned here, so that they don’t have to learn them the hard way, from experience.

One of the most important lessons that a college student can learn about money is to be responsible with credit cards and credit card offers. Nowadays students walking around college campuses are bombarded with credit card offers. Ironic, considering most students are either not employed, or have low-paying jobs. Some credit card companies even sweeten the deal with a free t-shirt or coffee mug. However, remember, the credit card company is not on your side! Most card offers look very attractive, especially when you convince yourself that the card will only be used for emergencies. It is not uncommon for credit card companies to advertise, “teaser rates” of 0% interest for the first year, then increase to somewhere near 24.99% after that. Ouch!

Visa and Master Card are not our only adversaries in the process of teaching credit responsibility. Department store credit cards must also be approached with caution. We have all been there; you bring your purchases to the counter of a department store, the clerk rings up your items, and then asks if you would like to put today’s purchases on your store charge card. When you decline, or tell them that you don’t have a store charge card, the clerk delightfully brings to your attention that if you open a store charge account, you can save 15% on today’s purchases. If you agree, you fill out the card application, you are most likely approved, and you leave the store having saved 15% today and a brand new credit line to maintain.

Aside from a multitude of offers, one of the reasons that it is so easy for young people to get into trouble with credit cards is because there is a psychological disconnect when making a purchase on a credit card. This is so because you are not physically taking cash out of your wallet or writing a check, thus making it more painless to buy often and overspend. Even if you are someone who likes to use debit cards that draw automatically from your checking account, you are more likely to track debit purchases because the money is immediately removed from your account. It is for this reason that credit card holders must exercise great caution in purchases.

As you know, when you use a credit card to buy something, you are in effect, borrowing money from the credit card company. If you pay the credit card company in full at the end of that billing cycle, you will not accrue any interest and you will have essentially used the credit card company’s money for free for that time period. However, credit card companies make it all too easy for customers not to pay off their balances in full every month. For a college student, it’s very easy to overlook the part of the billing statement that lists the full balance, and instead concentrate on the part that lists the much-smaller minimum payment.

This can be a dangerous game, especially if you continue to charge on the card and only make the minimum monthly payments. For example,

If you have a $500 balance on your credit card with a 24.99% APR, and make a minimum payment of $20 per month it will take you 3 years to pay off that credit card. Furthermore, you will end up paying a total of $720 to the credit card company for $500 worth of purchases. This assumes you don’t make any additional purchases!

From the above example, it’s no wonder that so many students get into credit card trouble.

Credit cards are not inherently evil. Credit is a financial tool that, if used effectively and responsibly, can help you to achieve your goals. It is important to know how credit works, and how and when to use it appropriately.