If you’re a college student, you probably already have a credit card. If not, you may have plans to get one or more soon. So why should you read on?
- Because financial debt is one of
main reasons that many students end up dropping out of college.
- Because your college years can be some of your most memorable—and some of your most costly. They don’t, however, have to be beginning of an adult life strapped with debt.
- Although you may still feel in limbo between your teen years and adulthood, it’s time to take charge of your finances and manage them as an adult. The sooner you do, sooner you’ll be able to start saving and spending your own money.
For those new to credit cards and for others who know all about credit, let’s go back to basics.
Why do credit card companies court college students?
It’s obvious by friendly representatives who offer a free t-shirt or CD just for signing up in student center. Or applications slipped into bookstore bags. Or mail boxes crowded with card offers. Credit card companies want college students to carry their card.
Did you ever stop to wonder why? One reason is loyalty—once a person has a card in their wallet, they are likely to keep that particular card and its upgrades for years to come. Another reason: college students are good customers.
While this may seem ironic considering that most college students are without a steady source of income, Robert Manning, Ph.D., Professor in College of Business at Rochester Institute of Technology and author of Credit Card Nation, says this is one example of how credit card industry has changed radically in past decade or so. “Previously, conservative rules deemed a good customer as one that paid their bills on time,” he says. “Now, a good customer is one that can’t repay their debt.”
“Credit is no longer an earned privilege,” continues Dr. Manning. “It’s now considered a social entitlement, and screening criteria (for card applicants) is weak.”
Banks make money by charging annual fees, late payment penalties and interest fees on unpaid credit card balances. Therefore, card holders with revolving debt (those who do not pay their balances in full each month) are desirable. NellieMae.org illustrates this point beautifully through an example of a student with a credit card balance of $7,000 at an interest rate of 18.9%. If this student faithfully makes minimum monthly payment of 3% or $25 – whichever is higher, and does not charge anything else to account, it will take more than 16 years and $7,173 in interest fees to repay bill!
Additionally, Manning notes banking industry has learned that college students will draw upon various sources of income to pay their debt—including student loans, money from part-time jobs, and as a last resort, many will ask a family member to supply funds to get them out of debt.
How to make credit work for you, not against you
According to Nellie Mae, 81% of college freshman have at least one credit card. And for good reason. Credit cards enable online purchases—from text books to concert tickets, make it possible to rent a car, and help with medical emergencies or vehicle breakdowns. Used wisely, credit cards can be helpful throughout college, and can assist you in development of financial management skills.
As soon as you get your first credit card or loan, you have entered world of credit reports and scores. A credit report is compiled by credit bureaus and contains information about your identity and credit relationships, among other things. Credit scoring is a system that lenders use to help determine your ‘credit worthiness.’ Credit scores are based upon your bill-paying history, number and type of accounts you have, late payments, collection actions, outstanding debt and age of your accounts.
