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Credit Cards: Another Day Older and Deeper in Debt

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Credit Cards: Another Day Older and Deeper in Debt

More students carry credit cards than ever. But watch out. What seems like easy money can amount to an ugly debt burden by the time you graduate.
The Stats on Students and Money Management
Why Student Debt Builds
Counting the Costs
Tips
The Stats on Students and Money Management
Studies indicate that 83 percent of college students have a credit card; nearly one-third have four or more.
Yet many carry a credit card without a full understanding of credit concepts. Consolidated Credit Counseling Services gives these statistics:
  • Forty-four percent of college students clearly understand the term budget.
  • Thirty-four percent of college students clearly understand the concept of buying on credit.
  • Only 8 percent of college students clearly understand compound interest.
What's more, students are going into debt on their credit cards. According to 2001 study, 21 percent of undergraduates had a card balance between $3,000 and $7,000. That was an increase of 61 percent from 2000.
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Why Student Debt Builds
In a study released by the Consumer Federation of America, Robert Manning of Georgetown University said that the student debt burden is not due to irresponsibility but results from peer pressure to spend and financial naiveté.
Students need to be better educated on the effects of using credit—especially the implications of accepting multiple credit card offers. According to the 1999 Youth and Money Survey, 79 percent of students have never taken a class on personal finance.
Said Manning, "The unrestricted marketing of credit cards on college...now poses a greater threat than alcohol or sexually transmitted diseases." Youth uneducated about finances often buy into the false notion that credit cards are "free money" or something they don't have to worry about until later. Some think that if they make the minimum payments each month that they will be okay. Moreover, affluent parents tend to bail out students who get in over their heads, according to the Manning study.
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Counting the Costs
Many credit cards offer you low introductory rates. Be careful. These rates will increase in a few months.
The truth is that credit cards are not free money. They are loans—loans that often have high interest rates attached to them. An average interest rate of 17.5 percent was reported in a June 2000 bankrate.com survey of 26 lenders that offer credit cards to students. This means that students pay not just for a purchase, but pay an additional 17.5 percent of that purchase price just to use a credit card.
If you don't pay your bill off at the end of the month, then finance charges begin piling up. And if you don't pay your bill on time, again, you will get a punitive fee
The consequences can be harsh and last long past your college graduation. According to a recent study, in 1999 over 461,000 people under the age of 35 declared bankruptcy.
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Tips
The number one means for avoiding credit card debt?
Don't accept credit card offers. If you have cards, cut up the cards and throw them away.
If you are going to get a credit card, search for the one with the lowest interest rate and a low limit. Pay off balances at the end of each month to avoid additional fees—in 2002, the penalty fee charged by top credit card companies averaged $35, up from $20.90 in 1998.
If you want something on hand for an emergency, consider alternatives. For instance, some parents purchase a stored-value card for the student. These allow the parent to pre-set the balance thus limiting the amount that can be spent.
Others use a debit card, which works like a check; you have to have money in your account to use it. Also, students can beat credit card interest rates with a student loan to cover tuition and living expenses, and by building a budget.
If you do keep a credit card for emergencies, remember this advice from Steve Bucci, president of Consumer Credit Counseling Service of Rhode Island: "If you can eat it, drink it, or wear it, then it's not an emergency."