If You’re off to College, Learn to Keep Your Credit Card in Your Wallet: Tips for Managing Your Money
August 26, 2009
Study Shows College Students Are Piling Up Record Debt, Says I.I.I.
INSURANCE INFORMATION INSTITUTE
New York Press Office:
(212) 346-5500; media@iii.org
Washington Press Office:
(202) 833-1580
NEW YORK, August 26, 2009 — In the midst of the
worst economic times in years, many of today’s college students are
turning to credit cards to finance their college education, using them
for everything from everyday necessities to books and tuition. But now
more than ever students need to resist the temptation to use their
credit cards to make up for the lack of cash in their wallets,
according to the Insurance Information Institute (I.I.I.).
A recent study by Sallie Mae, a leading provider of student loans,
shows that students are using their credit cards more and more
frequently, and racking up more debt than in years past. According to
the study, the average undergraduate carried $3,173 in credit card debt
in 2008. College seniors graduated with an average of $4,138 in credit
card debt, up 44 percent from 2004.
“This year, college students are going to find it much harder to
make ends meet because everything is more expensive and interest rates
on credit cards have gone up. If they’re not careful, by the end of the
year, many students will have dug themselves into a financial hole that
will be very hard to get out of,” said Jeanne M. Salvatore, senior vice
president and consumer spokesperson for the I.I.I.
Eighty-four percent of all incoming freshman will have a credit
card when they arrive on campus and most undergraduate students will
have four or more cards by the time they graduate, according to Sallie
Mae.
“A person’s credit history begins with a first credit card,” said
Sally Greenberg, executive director of the National Consumers League.
“Most young people are surprised to learn that their credit history
will affect them in a myriad of ways including the ability to rent an
apartment, finance the purchase of a car, insurance, even when applying
for a job.”
Parents and students need to work together to develop a financial
plan for college. Specific educational expenses including tuition, room
and board, books and fees can be viewed as “good debt” and can be
covered through student loans, grants and the like. Day-to-day college
expenses, including personal needs, transportation costs, telephone and
other incidentals, are the types of expenses that students should not
charge on credit cards.
“In most cases, college is the first opportunity for young people
to make independent financial judgments,” pointed out Salvatore.
“Carrying high, unpaid balances is one of the quickest ways to incur
too much debt and fall behind in payments. If college students plan to
use a credit card regularly, they should have limits and know ahead of
time where the money will come from to pay the bill at the end of the
month.”
When deciding on a credit card, students should read the fine print and shop around for the best terms. Look for cards that:
Have an annual percentage rate (APR) at or below 15 percent
Offer a grace period of at least 25 days
Feature no annual fee
To develop good financial habits, the I.I.I. suggests that students:
Plan and stick to a budget. Living within a budget is an important skill to master.
Pay bills on time.
Students who pay bills on time will start to build a solid credit
history. Late payments can also be expensive since they include stiff
penalties and may result in an increase in the annual percentage rate
(APR).
Use credit responsibly. Remember, credit is a loan—one that will need to be re-paid with interest.
Keep in touch with creditors.
If students change residences and forget to tell their creditors, a
series of lost bills can result in a black mark on a credit report.
Such black marks stay on credit reports for seven years and
significantly lower credit scores. Most students on campuses today have
computers, which means they can take advantage of electronic billing
and payment in order to avoid lost bills.
What can you do to improve your credit score if it has been damaged?
Do not pay someone to "fix" your credit
history. Some credit repair firms promise, for a fee, to get accurate
information taken out of your credit report. Accurate information
cannot be deleted from your credit report. Some credit repair firms
promise to fix your credit report by challenging information it
contains, but they charge you a fee to do so. This is something you can
do for yourself without paying the fee.
Create a plan to improve your credit over
time. Pay your bills on time. Pay at least the minimum balance due, on
time, every month. If you cannot make a payment, talk to your creditor.
Work to reduce the amount you owe, especially on revolving debt like
credit cards.
Do not max-out your credit limit. As a
general rule, keep limits on credit cards below 50 percent to avoid the
risk of hurting your FICO® score.
Limit the number of new credit accounts you
apply for. New applications for credit in a short time will generally
lower your credit-based insurance score.
In addition to the number of cards, the
limits and the amount you use them, it is also important to consider
the APRs of the cards you are using. APRs are not currently reported by
credit card companies to the credit bureaus, and therefore they cannot
be explicitly considered when computing your FICO score. However, you
should know the APR of all your cards so you can add debt to a low APR
card and pay it off from a high APR card. Paying off cards with higher
APRs devotes less money towards interest, and leaves more money
available to pay down your balances.
Keep at it. Your credit history will
improve over time if you make changes now. If you manage your credit
obligations effectively, your credit-based insurance score will improve
as well.
Consider credit counseling. If you find
yourself in a financial bind, consider credit and money counseling.
Information is available from the
National Foundation for Credit Counseling or the
American Center for Credit Education.
Students should also consider taking advantage of the financial
literacy programs that are offered by many colleges and universities.
Information on how to improve your credit score used by lenders is
available at www.myfico.com.
You have the right to dispute any
information in your credit report. By law, the credit reporting agency
must provide you with a free copy of your credit report and must
correct inaccurate or incomplete information at no charge to you. The
three national credit reporting agencies are:
For more information about credit-based insurance scores and a free copy of your credit report, you can access information from Fair Isaac® or the Federal Trade Commission (FTC).
The I.I.I. is a nonprofit, communications organization supported by the insurance industry.
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