3 Lessons in Credit Card Debt for College Students
by Mara Strom
It’s a conundrum. When you graduate from college, you’ll want to have a good credit score. Everyone from mortgage banks to potential employers will be checking your credit report to see if you are a credit worthy individual. And if you have never had a credit card (or some kind of secured debt, such as a mortgage or car loan), then your credit worthiness will not be rated very high.
How can that be? — you might be wondering. You chose not to take out a credit card because you wanted to be responsible: To *avoid* the trap of consumer debt. Well, unfortunately for you, the credit reporting agencies use your credit card history to calculate your credit score. Also known as a FICO score, your credit score is configured using a mathematical formula to measure how responsible you will be — as a borrower, as a tenant or even as an employee. Your FICO score is based on factors like your debt to income ratio and even whether you’ve ever been late on a payment. No credit card, no payment history, no passing credit score.
Of course, odds are that you will be signing up for a credit card — if you haven’t already. Three out of four college students carry at least one credit card. And the average balance come graduation is $2,200. Most of these balances have nothing to do with tuition, room or board. These are consumer expenses — a slice of pizza, a new DVD.
Let’s play this out. Say you’ve got a $2,200 debt at the relatively low annual percentage rate of 20%. If you pay the minimum faithfully and never charge another dime, it will take you two decades to pay off your college debt. Imagine being in your late 30s and still paying off a CD you listened to when you were 18.
How do you avoid the pitfalls of student credit card debt while still establishing yourself as a credit worthy individual? Try following these 3 tips for being a responsible manager of your plastic:
#1 Keep Your Limit Low
When you take out a credit card, the lender sets a credit limit — the amount they are willing to loan you based on your income and repayment history. If you’ve had a credit card for a while, most lenders are more than happy to increase your limit if you ask. Some don’t even wait for you to ask, they just raise it. Why? Because the higher your limit, the higher your interest payments when you max out your limit. Avoid temptation by not spending to your limit and keeping tight reigns on the limit increases.
#2 Pay the piper on time.
Pay close attention to the due date on your credit card(s). Your check must arrive to the credit card company by this date — not just be postmarked by this date. If your payment arrives even a day late, you will face steep late fines (as much as $35 or $40). But beyond the monetary sting, late payments will show up on your credit report — and stay there for seven years.
#3 Live like a starving student.
Last week, we talked about how to make (and live by) a budget. All too often college students rack up credit card debt because they assume they will be able to pay it off easily once they get a full-time job. But between the pinch of paying off student loans, rising costs of living and diminishing starting salaries, paying off $2,000 or more in college debt won’t be that easy after all. Instead of climbing that mountain, why not try living like a starving college student while you are in college, so you don’t have to once you graduate.
If you want to read more about how to manage your money while at college, check out our earlier posts on buying textbooks on a budget and eating on a budget.