Starting Out
Just Say No to Credit Cards
Too many college students are addicted to plastic. Here's why you should ignore the credit card solicitations -- for now.
By Erin Burt, Contributing Editor, Kiplinger.com
August 9, 2007
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Heading to campus this fall? Before you've even had a chance to buy your textbooks, meet your roommates or scope out the library, you'll probably face a life-altering decision: Should you get your first credit card?
Easy credit abounds on college campuses. Lenders see students as walking dollar signs with fairly low risk. They know you are quite capable of running up sizeable debts, but you're young enough that Mom and Dad will probably help pay your bills if you get in over your head.
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Don't get lured into trading your financial well being for a free T-shirt during orientation week. Lenders peddle credit cards like drugs, and plastic can be just as addictive. Card companies will try to persuade you that you need one: that just one card -- even with a low spending limit -- won't hurt and that having a credit card will improve your social status.
What you won't hear in that pitch is a mention of the dangerous side effects. You will want to get a credit card eventually, but fresh out of high school is not the smartest time for most of us.
Ripple effect
The average college freshman has $1,533 in credit card debt, according to a study by Nellie Mae, a student-loan provider. And that figure grows to $3,262 by the time he or she graduates. (Plus many have thousands of dollars in student-loan debt on top of that.) Half of freshmen carry plastic. And by the time they reach their senior year, 96% do -- with two-thirds of seniors carrying four or more credit cards.
So if everyone's doing it, it can't be that bad, right? Wrong. When the bills come due and interest charges pile up, too many students realize they took on more than they can handle. In fact, 7% to 10% of students will drop out of college due to credit problems, says Robert Manning, author of Credit Card Nation. "The initial freedom offered by credit cards may become financial shackles by the end of their college career," says Manning.
Once you start falling behind financially, you could sentence yourself to a lifetime of high rates on everything from car loans to mortgage payments to insurance premiums. That starter credit card your freshman year of college could potentially wind up costing you thousands of dollars down the road. (Learn more in Why Your Credit Score Matters.)
Training wheels
I know, I know. You're smarter than that. You have rock-solid will power. It would never happen to you..
Some of the smartest, most disciplined people I know have gotten in over their heads with credit-card debt. The siren song of buy now, pay later is tough to ignore. After all, you reason, you know you should start building a credit history while you're young. You've got to learn to use a credit card eventually. And how else will you buy all those textbooks and school supplies (and pizza and beer)?
Stick with a debit card. The fact is, most college students don't need a credit card and shouldn't even dabble in one until their senior year. Instead, cut your financial teeth on a debit card. You'll need to open your own checking account once you go to school anyway (see Freshman Finance 101), and most come with a free debit card. You use it everywhere you would a credit card, and Mom and Dad can stock your account with money each month if they so choose.
Credit cards essentially give you a short-term loan. You borrow money you don't have. Debit cards, however, make good training wheels because they help you learn to manage your spending with real money. When you run out of money, you can't spend any more. Simple as that.
Avoid prepaid cards. Some financial experts advocate that teenagers and college students start with a prepaid credit card that parents can load with money because when the money's gone, it's gone. But such cards are laden with fees. Some charge fees every time you make a transaction, check your balance by phone, or get cash from an ATM -- not to mention many charge start-up fees and monthly maintenance fees. Prepaid credit cards are unnecessary when you've got a fee-free debit card with your checking account.
What about emergencies? Even having plastic for emergencies can lead to trouble. Says a colleague of mine: "I was given a credit card for emergencies -- and the trouble started when there was a sweater I really wanted (and bought) from J.Crew." More often than not, your definition of an emergency can be skewed in the heat of a moment. And you could pay dearly for your lapse of judgment.
Time to graduate
Once you've learned to spend responsibly and honed your financial management skills with a debit card, then you should get your first credit card your senior year of college. However, sign up for one before you graduate because, oddly enough, once you leave school and get a job with a sustainable income of your own, lenders aren't much interested in you. They know your purse strings are probably not tied to Mom's and Dad's anymore. (Find the best credit card deal when you're ready.)
"It used to be that a preferred customer was someone who paid bills on time and paid down debt," says James Scurlock, who made a documentary on debt called Maxed Out. "Now a preferred customer is someone who floats debt, pays interest and pays fees." (See Maxed Out on Personal Debt to read more from Scurlock and his film.)
If you don't get a card while you're still in school, it could be hard to come by later. And you'll want to start building a good credit history to improve your ability to get a car loan, a mortgage and good insurance rates once you're out of school. See Seven Steps to Stellar Credit to learn more about building your credit history from scratch whether you're still in college or already graduated.
Over your head in debt already? See Tame Your Credit Card Debt for strategies to get back on the right track.
P.S. What do you think? When should teens and college students get their own credit cards? When did you get your first one? Please leave your comments on this article below.
Reader Comments (15)
Posted by: Recent Graduate at 08/09/2007 02:20:59 PM
I did exactly what you're advocating. One credit card just before your senior year. I've never run a balance. I got one more card after I graduated and a car loan right after I graduated. I'm now totally debt-free, student loans and all, a year later at 22. My credit score is 775-790 depending on the qualifications of the lender. Keep up the good work, people shouldn't be so stupid with plastic.
Posted by: SelfControl at 08/09/2007 04:13:43 PM
I had my first credit card in high school and as a result, when I got out of college, I had a 6 year credit history. Practice some self control and credit cards are just another financial tool. If you're worried then yes, start out with the training wheels of a debit card but if you can control your money, start with a credit card as debit cards do not improve your credit history and score.
Posted by: julie at 08/09/2007 07:28:49 PM
I went on an apply-for-credit spree, when I got my first approval, I kept going until I was maxed out with everyone saying you are not approved. I have about 40-50 inquiries on my report, what can I do about this, and how will it affect me in the long run. I have noticed that my score has dropped significatanly and I have been approved for alot. I don't intend to use them, It was addicting to do everything on-line and see what happens. I have never done this before, what now???????
Posted by: David from CA at 08/10/2007 02:39:12 AM
I am a going to be a senior in college and I got my first credit card about a year ago. I use it for everything and make sure that when I do charge, I have the money in my bank account. I pay it off weekly. So far I havn't had a problem. I am building my credit and getting cash rewards. I have a chase freedom card.
Posted by: Bill Hardekopf at 08/12/2007 08:41:39 AM
Parents should start by sitting down with their kids and going over their own credit card bill. Explain about finance charges, grace periods and minimum payments. Explain about rotating balances and how much extra you will pay each year in interest charges if you only pay the minimum payment. It is also a good idea to show them a copy of your credit report and the effect of credit cards and other debt on their credit score and future financial options. Unfortunately, recent changes by FICO have eliminated the option of simply adding your child to your credit card account to help them get their start. This change means that college students should apply for a credit card in their own name while they are in college because this will be the easiest time in their lives to get a credit card. If they wait until after college, they will probably have to start with a secured card or store card to begin building credit.
Posted by: Andrea at 08/13/2007 03:25:02 PM
You mention to stay away from prepaid cards (because of fees) and get a checking account debit card instead. checking accounts carry the same kinds of fees from monthly usage to ATM usage to overdraft fees (which could be exorbiant!). At least prepaid teaches you to spend only what you have.
Posted by: Kaye at 08/17/2007 07:41:43 AM
I got my first credit card during my first job out of high school, working at a bank. It helped me establish good credit, but I quickly went out of control. Over the years I charged things I couldn't afford otherwise and by the time I was 30, I had over $20,000 worth of credit card debt. I went into a debt counseling program and paid if off in 5 years, but it was really HARD. I learned my lesson!
Posted by: tony schnell at 09/02/2007 07:38:59 PM
I dont think that just saying no to credit cards is the right move, its always good to have a credit card for renting a car, etc. I travel a lot and having an airlines credit card pays off.
Posted by: Big Lance at 09/06/2007 09:53:50 PM
I have been thru the TRAP of college creditcards with no job... I could go into many stories but the article did a good job already. Like most college students I had no job and was able to get 3 credit cards in my freshmeat- i mean freshmen year and by the time I was a senior I had over ten..IT WAS SO EASY ..only in my sophomore and senior years did I have a job.. which was mainly to pay off a bill or buy something I wanted. I cannot stress enough the creditcard companies are banking on your stupidity. You must realize they know its sooo tempting and easy to just use the plastic and lose control. I remember times when I had over $100 in my wallet but still use the plastic to buy gum/food/snacks/take cash advances etc..that last one is a real hum dinger..cash advances has not changed... its was 19% to 32% interest in the 90's when I was in school its just as bad today. Once i remember taking $100 and having to pay back over 250 only 60 days later or less Everyone says I only need one for emergency.. your fooling yourself if you truly believe that. USE CASH USE CASH USE CASH is the best phrase to implant in your head.
Posted by: Michelle at 09/20/2007 12:19:21 AM
I got my first credit card at 19. The whole reason i got it... you're gonna laugh at this.. was because I could get one with a ladybug on it. I was (and still am) obsessed with them.. just so cute. Anyways.. once I got it, it was my sole intention to use it for 'emergencies only' since I didn't have a job at the time. And that went real well... didn't use it for the first six months I had it. Then i got a job and decided that i'd use it to start building my credit.. buy something.. but Only if I knew FOR SURE that I could pay the bill in full the next month. and that worked really well too. it was still an 'emergency only' card for the most part.. and that's what got me. I am 21 now and currently have about $1,600 in credit card debt. At least it was for that emergency though.. the company I was with went outta business, so I had lost my job.. and the next week the house i was renting was sold.. and i had one week to get out. so the card was used for getting an apartment, paying the starter fees for the electric and what-not.. all that to say that it doesn't really matter what age you are when you get your first card.. it just depends on how you were raised and if you're responsible and mature enough to be able to handle it.
Posted by: Nic at 09/20/2007 12:16:24 PM
I'm a junior and have two credit cards. I started out with a debit card then after a year and half I decided I should start something to help with my credit since I was moving out in less then a year. Basically my credit card replaced things I would pay off with my debit card, gas, cell phone bill. I didn't go out to make any new purchases with it just replace ones I already had. Also with online bill pay, I was able to pay it off as I went, make a purchase, make a payment. This was last november. I ended up moving out of state and 12 hours from home. I had to open another checking account and went with chase since thats where my employer banks. They offered me a 2nd credit card saying 2-3 from different institutions is recomended for credit reasons, not being the first time I heard this I went for it. This was the end of june, I made a mistake of not saving enough for my move. The credit cards, both of them have helped out. I have not paid interest on either one, though, it was the epitome of revolving credit. Basically I'd pay off my balance due but still end up leaving some on there for the next statement. I finally am getting caught up and getting them paid off entirely at the end of the month, all with out paying interest. I was scared id have to a couple times, but I managed it enough to where I didn't have to.
Posted by: J.J. at 10/08/2007 09:19:06 PM
Credit cards are addictive and my two cents on the subject would be this, people with poor impulse control should never own one in college, ever. But for those of us who have the discipline to say this card is just for emergencies or (as mentioned earlier) for buying things that would normally be purchased on a debit card, it's a great opportunity to build up credit. My only tip for college students with credit cards is this, figure out what's the most you'll spend on a credit card each month and do not bring your card with you if you know you have already hit that mark. Just leave it at home!
Posted by: Mommy at 10/14/2007 04:21:56 AM
This is for Michelle...you have rights while renting and even if someone sells the house, you cannot be evicted without your consent for 1-2 months. Be aware of your rights or you will be taken advantage of for sure.
Posted by: Bob at 10/20/2007 05:29:19 PM
Debit cards are also laden with fees! In particular check that the over-limit fees do not begin to multiply themselves after repeated accidents, as in the case of Bank of America, where fees begin at $18 per incident but double every third incident to a limit of somewhere in the neighborhood of $150 per incident. If you assume an accident rate one over-limit per month, suddenly the regular fees on the pre-loaded cards are looking pretty good. Money isn't cheap, after all.
Posted by: l.p. at 01/23/2008 10:51:28 PM
Don't "Just Say No to Credit Cards"...when a lot of college students have common sense. I am 23 years old, have had a credit card since the day I left for college and because of credit cards I have enough points, which are airfare and dollars, to pay for my entire honeymoon this summer. I have also never been late on a payment.