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College Student Debt Avoiding Credit Card debt on College Campuses
No discussion about money management is complete without a discussion of credit cards. College campuses across the country are allowing credit card companies on campus to solicit credit card applications. They are handing out credit cards to college students like candy on Halloween. College student debt and college graduate debt is affecting the financial health of our young adults.
Avoiding college debt starts with knowledge. When you use a credit card, it is the same as a loan. The credit card company is lending you money and charging you fees (interest) to borrow their money. The interest rate is determined from your credit history (your past record of paying bills and handling credit).
Student Credit Cards Convenience Credit cards are convenient and accepted at most businesses. Most importantly credit cards can be an excellent way for responsible spenders to build your credit scores while you're still in high school and college.
Credit cards are a handy tool for charging clothes and groceries - as long as you pay the bills in full each month. College student debt occurs when the bill is not paid in full and you end up paying sizable interest. When faced with an impulse or emotional purchase, it can just be too easy to pull out the plastic and make it. If you are tight on money, you might talk yourself into thinking it is not a big deal. But when the bill comes, it can be a painful experience if you didn't take your spending seriously!
A new pair of shoes that were on sale at a great price $68 A friend came in town for the weekend and you had no cash $75 A textbook you had to buy for class. At least you got it used. $48
That's $191. If you do not have the money this month, how easy will it benext month? And if you don't pay it off in full, the credit card company will start adding finance charges. At 24% interest - which is a very common rate for college students - this can add up to college student debt that carries over to college graduates debt. This is the flip side of compounding interest, and it gets you further and further down, into a spiraling-out-of-control debt.
Be the Credit Card Companies Worst Customer The best way to manage credit cards in school is to be the company's worst customer. Credit card companies make their money because many Americans carry a balance from month to month. It is important to pay your credit card bills in full each month by properly planning and budgeting for your purchases.
Carrying a small debt for two or maybe three months is not ideal, but may happen. Yet, carrying a balance longer than that is a good indicator that you are developing a debt management problem.
College Student Debt Relief Simply put, if you can't handle the debt of a credit card, you need to "cut it out" -that is, snip your plastic card into pieces, before you get in real trouble!
Whether it is $300 or $3,000 as a balance, at 24% interest, the same miracle of compound interest is now working against your financial freedom.
The problem with college student debt begins with the top two mistakes people make with credit cards:
Minimum payments A common misunderstanding is that it is okay to pay the minimum payment that the credit card company calculates for you. In fact, this is the minimum amount that, if paid, will keep your account active. It is never high enough to actually retire the college debt you built up. Let's look at an example:
You are in college and signed up for a credit card the first week of school. Quickly, they raise your credit limit to $1,500. In your sophomore year, you decide that a car would make life a lot easier to manage school and work. You find a good used car for $1,800. You do not want to empty your savings account, so you decide to pay $500 in cash and put the balance of $1,300 on the credit card. You have maxed your credit limit but you really want the car.
You get the first credit card bill and see that your minimum payment is $33. Take a look at what happens if you pay just the minimum. Your interest rate is 24%.
It will take you six years and eight months to pay off the debt, and it will cost you:
$1,300 for the original debt +$1,340 in interest $2,640 Total
That great deal got expensive! Unfortunately, the car will not be around in six years, but the debt you built up in college will.
Credit Cards do have Advantages If you understand the dangers of credit cards, you can see how it is possible to use them to your advantage. For instance, it is safer to travel with a credit card than a pocket full of cash. It is easier to rent a car with a credit card. And when emergencies happen, a credit card can be a lifesaver.
However, I recommend that - until you have your six-month of your bills saved - you should not apply for a credit card. First, you have to prove to yourself that you are able to successfully live within a budget.
When you have no credit history, a good option is to get a secured credit card. Visit www.freeby30.com/credit.html for a list of credit card companies that will extend credit to young adults. These cards often have high interest rates, but a secured card offers the convenience of having a credit card while you work on building a credit history.
How's it work? It is secured with a cash balance you deposit in their bank that cannot be touched by you. It is much like collateral for a loan. For example, you deposit $300 with the credit card company and you are approved for a $300 limit on your credit card. If you choose to close the card you would receive your initial $300 back. After you have a proven track record of managing the card, you can apply for an unsecured card - one that does not require a cash deposit as collateral.
To avoid the plague of college student debt and build your credit history, Your first step should be to use a credit card each month and pay off the balance in full. After six months or so you will already have started to build a solid credit history.
Of course, as you build your credit status, credit card offers will start flooding your mailbox. These offers vary wildly and you have to take a good look at what they are offering. Credit card companies love college students in debt. Just because they send you an application with a credit limit higher than you can imagine, does not mean that you should apply.
Teaser A common offer is to offer a teaser interest rate - 7%-16% for six months or up to a year. One late payment will catapult the rate up to 22%-29%! Also, many cards with low rates will have annual fees, so it is important to read the small print and determine what the card will truly cost you.
Basically, not too much in life is free, so keep your head screwed on straight and be careful that you don't fall into any "debt traps."
College Student Debt Elimination If you're already have a college student debt problem it's not the end of the world. It will just take added dedication to get out of the hole. The key to getting out of credit card debt is to prioritize the payments.
Call each credit card you owe money on and find out the interest rate they are charging you. While you have them on the line, ask about any promotional rates you may be approved for. Once you get the rates each credit card company charges you, organize a payment structure.
Pay the minimum payment on all credit cards except for the one with the highest interest rate. Put all the money you can to pay the high rate credit card down first. Once that is paid off, take the next highest rate credit card and pay that down. You will save a lot in interest by following this payment structure. Keep up that plan until you are free of all college student debt.
Vince Shorb advises young adults how to avoid college student debt and better their financial future. Creator of "Financially Free by 30" he is dedicated to providing young adults practical financial education and help students avoid the lure of student credit card debt. To get free videos on this topic and more visit: www.FreeBy30.com
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