A credit card can be a dangerous tool if used uncontrollably, but if used responsibly it can put a student in good financial standing, allowing them to make purchases and investments.
"Credit is not evil, it is necessary," said Sanyika Calloway Boyce, author of " SimpleCredit Basics." "College students need to establish good credit and understand how the credit system works early on."
One major issue is the fact that students do not understand the basic fundamentals of credit.
"The problem is that people do not understand the basics. Students do not know that there is a credit report on them and that employers are pulling students' FICO scores," said Peter Bielagus, financial author of "Getting Loaded."
FICO scores are what Bielagus calls "the equivalent of the GPA for the rest of your life." According to myfico.com, it is a number that represents your financial responsibility based on your credit history. The score is based on a scale from 300 to 850 and the higher the number the better the credit. Any of the three national credit bureaus will issue a score. Beyond looking at the actual credit score, employers may look to see what kind of debt a person has.
What students do not know is that although they owe $10,000 when they leave school, they may still be in good credit standing. Boyce, who is the founder of SCB Enterprise, said that thereis such a thing as good debt and bad debt. She said that bad debt is the amount of consumer credit you have while examples of good debt are student loans or mortgages. Good debt exists as "something that will contribute to society overall or is going to prove itself to be valuable at a later date," Boyce said. Both Boyce and Bielagus are in agreement that in order to establish good credit, only two credit cards are necessary.
"It doesn't make sense to have more than two [credit cards]. By having seven credit cards you can actually lower your credit score," said Lauren Skeffinton, a sophomore biochemistry major. She has three cards. One is a debit card, another is a credit card that she uses for food or other essential items, and the last is an Express card that she rarely uses.
Today 83 percent of undergraduate students have at least one credit card; a 24 percent increase since 1998, a 2001 Nellie Mae study reported. The study randomly selected data from 600 undergraduate students, attending four-year public and private insitutions who applied for a credit-based loan through Nellie Mae during the summer and fall of 2001.
How to manage money
Both Bielagus and Boyce agree that in order for a student to finance and manage credit card expenses, the student must establish a spending limit goal. Boyce believes the first step is understanding that the time you are spending in college is going to end. There may be things that need to be sacrificed. Students lack of financial knowledge puts them into situations that can jeopordize their credit ratings.
"Many students will go out and purchase ... and really don't know what they are doing ... and overspend," said Michael Benson, the Student Government Association's vice president for financial affairs.
Creating a list of what you want to do with your money and what you already did with it allows you to see if spending goals match up, Bielagus said.
Boyce recommends having only one charge card and one credit card. A charge card, like American Express, will allow charges only to a specific amount and at the end of a 30 day cycle, the balance must be paid. A credit card allows any amount to be charged and can be paid off over a certain amount of time with interest. The Federal Trade Commission recommends the American Express Card because after a month of expenses, the card can no longer be used until it is paid back in full.
Benson recommends that students use credit cards more frequently than debit cards because most of the time debit cards have a fee that is applied whenever they are used. However, he said, students must be sure they have the financial ability to pay for purchases back on time.
"Financially there is little that you can do to take in more money than what the credit card companies are taking away," Bielagus said. "So drop down to two credit cards and work on paying off the balances."
Boyce recommends students start by "systematically reducing your debt by your highest interest rate not your highest balance."
Kristen Bratko, a senior history major did just that. She used Ameridebt, a non-profit credit counseling company that worked with her credit card companies to lower her interest rates and monthly payments. The interest from her Visa went from 25 percent interest to 10 percent after consolidation. Although she pays $25 a month to Ameridebt, she said she saves at least $50 a month in interest alone.
"By consolidating, it prevented me from spending more," said Bratko. "I think I would definitely be over my head or unable to afford pretty much anything or might even have to declare bankruptcy."
Bratko knew when her expenses went overboard and was lucky to be able to get out when she did.
It's not too late for other students to get out of debt if they start being conscious of their spending habits now.
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