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What you need to know on credit and debt to avoid pitfalls later
By Betty Lin-Fisher
Beacon Journal business writer
Published on Sunday, Aug 10, 2008
I have one last graduation gift to recent high school graduates and those about to head off to college: A crib sheet on important financial lessons you need to know as you gain a little independence.
This is one of those things you might want to study up on before life throws you a hard lesson.
In fact, while this gift is designed for our high school graduate set, a few of you ''veteran'' students and adults might want to take note, too.
Lesson 1: Credit is good, but with it comes responsibility.
You'll be strolling on campus and feeling all independent when you see the booths or offers for your very own credit card — maybe even one emblazoned with your school mascot or your favorite sports team. With it, you can get a free gift, like a water bottle or T-shirt or possibly these days, an iPod or other gadget.
''Cool,'' you think. ''I'll get a credit card and something free.''
But don't go get every credit card and freebie out there that you can.
Establishing credit in your own name is a good thing and helps you build your credit score, which will follow you for life and help you qualify for loans on a car and a house and other things after college, said Ron Stolle, an assistant professor of finance at the Kent State University College of Business Administration.
But if you decide not to be responsible about paying your credit card bills on time or running high balances (with high interest rates), then that credit score is going to haunt you as all types of industries (and even possibly your future employer) will look at your score and make determinations (like higher insurance premiums). Your credit report (and thus your credit score, which is based on your report), is a history of your financial payments and credit limits received.
''We need to remind students that there is a difference between credit and debt,'' said Laura Levine, executive director of JumpStart Coalition for Personal Financial Literacy in Washington, D.C. ''Debt is what's problematic and the accumulation of more debt than what a consumer can easily pay off. . . . Sometimes we forget to remind college students because we think they're so smart and this is so obvious. They're young adults who may be out on their own for the first time and they just may not have focused on this.''
Lesson 2: Don't spend more than you can afford to pay off.
There are stories of college students who get multiple credit cards, rack up the charges while not paying them off and graduating with not only a diploma, but tens of thousands of
dollars in credit card debt. Add to that their hefty student loans, and it really weighs down a lot of new graduates from getting a good start on life.
If you buy something, realize that you're going to have to pay it off, Stolle said. ''The most appropriate use [of a credit card] is if you're going to buy something, do it for the convenience sake, but pay the bill when it comes in. Don't incur the interest costs.''
Debit card use is popular and can also be used wisely, but can also be ''fraught with dangers,'' Stolle said. Make sure you understand that the debit card is directly linked to your bank account and the money will come out immediately. Also, while most debit cards have similar fraud liability issues as credit cards, it can take time for a disputed charge to get credited back to your bank account. For a poor college student, that could be a hardship.
While two recent studies surveying college students show that there really are a lot of responsible consumers out there, some of the figures also show there are still lessons to be learned.
A study by the JumpStart organization of more than 1,000 college students showed that 31.2 percent had one credit card and 19.3 had two credit cards, but 4.1 percent had five or more credit cards.
And while 46.7 percent of those students always paid off their balance each month, the other 53.3 percent were carrying a balance of some sort, with 7.7 percent of the respondents saying they only pay the minimum required each month (which can mean it will take years to pay off your original balance plus more money in charges).
Finally, again, while 69.1 percent of the students had a balance of $1,000 or less, the others had higher balances, including 1.6 percent who reported more than $10,000 in credit card debt.
In a Student Monitor survey, which gauges colleges students yearly, nearly two-thirds of the 1,200 surveyed said they got their first credit card before age 19, with 92 percent saying they got them as college freshmen.
Lesson 3: Shop around for cards with no fees and low-interest rates and look at your bill each month.
If there's going to be a time when you run a balance, you want to make sure that you're paying the least amount of interest on that balance. Also, always pay your bills on time. There's something called ''universal default'' on most cards, which means if you're late on one card, all of your other accounts can automatically increase your interest rates on their cards.
''Go out and make sure you're getting a good deal on your credit card.'' Go to http://www.bankrate.com' or some other Web site that compares cards, Stolle said. ''Most of the introductory cards will not have a fee, but they're good for a year and then the fees come in.''
Once you pick a card, keep an eye on the charges, either online or in your monthly statement.
''If you don't check your credit card statements, shame on you,'' Stolle said. Make sure there are no charges that you don't recognize.
Lesson 4: Don't get caught up in the ''game'' of getting lots of credit cards and going for the highest credit limit.
Karin Maloney Stifler, a certified financial planner in Hudson and national board member of the Financial Planning Association, suggests getting one credit card with a low limit of $500 to start. Perhaps after sophomore year, when you've proved that you can handle the responsibility, get another card.
Stolle recommends two cards to have — one for an emergency if the other becomes damaged — and also to stick with a low-credit $500 limit.
''I think [having two cards] is just a safety point. But having 20 cards and saying, 'Look at me, I've got all this credit' is stupid,'' he said.
Lesson 5: Weigh your student loans carefully.
Shop around for your student loans and make sure you can afford to pay off the loans with the salary in your intended career, Stolle and Stifler said.
Graduating with tremendous debt pulls down your ability to be able to get additional credit when you need it after school, Stolle said.
''If you're studying to become a social worker and your income potential is $18,000 or $20,000 a year, stop and think before you take on $60,000 worth of debt. You will never get out from under that,'' Stolle said.
In the same vein, when you're choosing schools, consider that a degree from a prestigious and expensive university might not be worth more than the same degree from a lower cost public university, Stifler said.
Lesson 6: Get some lessons from your parents or a trusted adult about personal finance — they really do know what they're talking about.
Ask your parents for some advice on how they manage their finances and take their advice on how to get a start on yours. Or, if your parents aren't particularly talented on spending issues, then find a trusted adult friend and ask them. Or maybe even get some education on your own.
Stolle teaches a personal finance course to Kent business majors and will be offering a new course targeted toward liberal arts seniors called ''Me and My Money.''
It's designed to teach graduating seniors the things they'll need to know when they get their first job and salary, such as 401(k) contributions, home, auto and life insurance, how to start saving to buy a home and other purchases.
Without the proper knowledge, many college graduates make inappropriate choices, Stolle said.
''If they learn to save in their 20s, they can secure their future,'' he said.
A final note to parents from the experts: take an active role in teaching your young adult about personal finance. Don't just give them money and tell them to figure it out.
Betty Lin-Fisher can be reached at
330-996-3724 or blinfisher@
thebeaconjournal.com.
I have one last graduation gift to recent high school graduates and those about to head off to college: A crib sheet on important financial lessons you need to know as you gain a little independence.
Get the full article here.
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