TIP OF THE WEEK - May 31, 2011

Bad Credit Sends More Students Packing Than Poor Grades

According to a survey of student loan applicants by loan provider Nellie Mae, 83% of college undergrads use credit cards and the average card debt was $2,327 in 2001. Furthermore, the college students surveyed steadily increased usage rates and balances. From freshman to senior year, the average debt load more than doubled and number of cards held nearly tripled.
It’s easy to see why more students drop out of college because of debt than for poor grades.
But don’t forget that credit cards are designed for people with income—solid cash flow. Most young teens and college students don’t have much income. While using credit is not a beginning financial skill, teens do need to learn how credit works.
How can parents ease young teens into the eventual freedom of credit cards? Allow a debit card tied to a checking account or a fixed-amount card such as Visa Buxx, designed especially for teens. Or, try a credit card with parent supervision and low limit—$500 or less.
Before teens become regular credit users or abusers, encourage them to:
1) master a checking account, write checks, and reconcile statements
2) show responsible debit card use and understand ATM fees
3) compare credit card offers and read the fine print
4) understand interest rates and billing cycle.
Credit cards do remain an attractive alternative to cash for four reasons, providing it’s used wisely.
1) Credit is handy—and safer—to carry.
If teens don’t ever see cash leave their wallets, however, it’s difficult for them to understand the reality of expenses, budgeting, and cash flow.
2) Buy now, pay later.
Paying later also makes it easy to overspend, and not be able to pay when credit card bills arrives. It’s not easy for anyone to have the willpower to curb credit card spending once the habit is started. Teens need maturity to overcome the “I-want-it-now” syndrome.
3) A credit card is good for emergencies, when you have no cash.
But buying daily lattes, new clothing every trip to the mall, or pizza on weekends doesn’t count.
4) Using credit establishes a credit score.
Yes, frequent use of a credit card does build a credit history—good or bad. But overspending and irresponsible use can tarnish a credit score for years and affect interest rates for future loans.