Heading off to college during the worst economic times in 30 years means students will be forced to learn some very tough lessons about living on a budget. Now more than ever, students must avoid the temptation to use their credit cards to make up for the lack of cash in their wallets, says the Insurance Information Institute (I.I.I.)
"This year, college students are going to find it much harder to make ends meet because everything is more expensive. Not only that, 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 at the I.I.I.
Seventy-six percent of all incoming freshman will have a credit card when they arrive on campus, according to Nellie Mae, a leading provider of student loans. Most undergraduate students will have four or more cards by the time they graduate. In fact, most students carry an average credit card balance of nearly $3,000 during their final year of college.
"A person's credit history begins with a first credit card," says Sally Greenberg, Executive Director of the National Consumers League. "Most young people are surprised to learn that their credit history will affect them for the rest of their lives -- whether or not they will be able to rent an apartment, finance the purchase of a car and even get a job."
Parents and students need to work together to develop a financial plan for college and a budget. 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 more often than not charge on credit cards.
"In most cases, college is the first opportunity for young people to make independent financial judgments," points out Salvatore. "They are preparing for life, but in the process, they shouldn't be digging themselves into a financial hole that will engulf them for years afterwards."
Consumer debt is much more expensive and needs to be carefully monitored. 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 at or below 15 percent,
* Offer a grace period of at least 25 days, and
* Feature no annual fee.
As students use credit cards and start paying other bills, it is important to check credit reports. By law, consumers are entitled to free copies of their credit reports once a year from the three major credit reporting agencies. Free annual credit reports are available from the only online authorized Web site, AnnualCreditReport.com or by calling the toll free number 1-877-322-8228.
To develop good financial habits, the I.I.I. suggests that students:
* Learn to 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 penalties,
* Use credit responsibly. Remember, credit is a loan -- one that will need to be re-paid with interest. Monitor monthly bills and make spending adjustments accordingly. Also, avoid spending up to the limit on credit cards. It is a good idea to have credit available for emergencies,
* 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 will have a computer, which means they can take advantage of electronic billing and payment, and
* Consider credit counseling. Those who find themselves in a financial bind should consider credit and money counseling. Information is available from the National Foundation for Credit Counseling at http://www.nfcc.org. or the American Center for Credit Education at http://www.acce-online.com. Students should also consider taking advantage of any financial literacy programs that are offered by many colleges and universities.
For additional information regarding credit, contact the Consumer Data Industry Association at http://www.cdiaonline.org or go to Fair Isaac at http://www.myfico.com to get a copy of your credit score.