Credit Cards 101: Helping Students Manage Easy Plastic

Before they ever set foot on campus, college freshmen have typically received dozens of offers for credit cards, giving a whole new meaning to the term "college credit."

The pressure doesn't let up once they've settled into the dorm, says University of Connecticut junior Jeremy Radachowsky. "Very often credit-card companies have booths or tables set up around campus with boxes of T-shirts, candy, prizes, anything they think college students want."

No job, no credit record, no experience with credit? No matter, say credit-card issuers. If you're a full-time college student, it's as easy as filling out a form and waiting for the preapproved card to arrive in the mail. While major credit-card companies have targeted students for at least 15 years, the marketing has become increasingly aggressive during the past five years.

Indeed, students who can't slap down a major credit card to pay for dinner or books are the exception, not the rule. "According to the Roper College Track Financial Services Study, 64 percent of college students have a credit card," says Norma Tharp of the nonprofit Consumer Credit Counseling Service (CCCS) in Atlanta. "That's up five percentage points from 1995." Many have more than one - a big mistake according to consumer experts, who say that the more cards a student has, the easier it is to fall deeply into debt.

Although he signed up for Discover and Visa cards based on the gifts that came with them and because they didn't charge an annual fee, Jeremy says he rarely uses his cards. "I just keep them handy in case of emergencies. Cash is more convenient."

Cash is cheaper

Paying cash is also cheaper than carrying a balance on a credit card, points out Ruth Susswein, executive director of Bankcard Holders of America, a consumer education group. "It's important for kids to keep in mind that a credit card, when the balance is not paid, is a loan, and it's often a very expensive loan.''

But while it's possible to get through college paying cash, "the reality is that young adults are going to be where credit is very available, and they need to learn how to manage their money ... when to avail themselves of credit and when not to," says Suzanne Boas, president of CCCS.

She suggests that parents and student sit down and draw up a budget so everyone will have a good idea of where the money's coming from and where it's going, which expenses the parents will cover and what the child is expected to pay for.

"Otherwise," she says, "that failure to plan is going to catch up with them, and they're going to use credit cards to help them compensate for their lack of planning. They're going to make commitments they can't honor with cash, so then they're going to have to rely on credit."

Mrs. Boas, the mother of a college sophomore, says it's important to explain how easy it is to get overextended. "I call this generation the 'now' generation because there's a lot less delay of gratification. If you want everything now, it's going to cost you."

A few days ago, she relates, a recent college graduate came to the CCCS office for counseling. He had been working as an accountant since May at a salary of $28,000 a year. Finding that he couldn't make ends meet, he took a part-time job that paid $3,900 yearly, for a total gross pay of almost $32,000 a year. His assets are a 1992 car and $250 in stocks. His debts total $85,000: $10,000 on the car, $33,000 in student loans and $42,000 in credit-card debt that he owes to 26 different companies.

"This person obviously wanted it now and got it now and was going to pay for it later," she says. "I call these kids indentured servants. This person is coming out of school and should have his whole life ahead of him. But he's indentured to that debt burden, and it's just horrific."

To ensure that students stay solvent, Ms. Susswein suggests parents get down to basics. "Ask them how many cards they've applied for, because there's no need to have more than one." She also suggests helping them choose a card with no annual fee and the lowest interest rate available, and not be swayed by short-term "teaser rates,"' which will rise.

That minimum payment

Another pitfall is paying only the minimum required. "Only $10 a month" may sound tempting, but "you're not doing yourself any favor [by paying such a small amount]," she says. "You're making the bank rich and putting yourself in debt potentially for decades if you continue making only minimum payments."

A typical balance on a major credit card these days, she says, is $1,900. Assuming an interest rate of 18 percent and a minimum payment of 2 percent, it would take 23 years and three months to pay off paying only the monthly minimum. And that assumes the user doesn't charge another penny for the next 23 years. "When you pay that $1,900 back, you will be paying - in addition to the $1,900 you originally spent - $4,790 in interest," she says.

Some kids pay attention to such arguments, and others are swayed by their peers. Bob and Melanie Mason of Saratoga Springs, N.Y., have learned that from sending four children to college. "Two of our kids charged no more than they could afford to pay off each month and mainly used their cards for emergencies and travel," Mrs. Mason says.

The others ran into some problems, although their parents had talked with them about the dangers of getting into debt. She wishes her children had been able to take personal finance classes in junior and senior high school.

Boas understands that it's not always easy for parents to talk with their kids about money. She remembers a letter from a young woman thanking her for the opportunity to talk with one of the CCCS counselors. "She said, 'I got all the advice without the lecture my father would have given me.'"

Such advice is available at all agencies that are members of the National Foundation for Consumer Credit. Call (800) 388-2227 or access the group's site on the Internet at http://www.nfcc.org to locate the nearest office.

For $1, students can obtain a copy of "College Students and Credit." Write to: Bankcard Holders Of America, 524 Branch Drive, Salem, VA 24153.

With Money Management, Practice Makes Perfect

'The wrong place for kids to learn to manage a credit card is in the dorm with their peers," says Suzanne Boas of Atlanta's Consumer Credit Counseling Service. "I think we're unrealistic to give them their first checking account two weeks before they go off to college and expect they're going to manage their money effectively.''

She urges parents to begin money management training as soon as children can handle it. Even if it's a $2 a week allowance at eight years old, youngsters "need to learn by experience that you can spend a dollar only one time. And you've got to make choices and establish the difference between what you want and what you really need.''

These lessons may not always be trouble-free - for parent or child. But that's OK, she says. "It's important for children to have the opportunity to fail while the consequences are pretty small. If you get a quarterly clothing allowance when you're 13 or 14 and you blow it, your parents are going to see that you've got a coat.'' But they're not going to buy the needed underwear when the money was spent on the latest fads, so the lesson is learned.

"Controlling yourself financially is the same as controlling your weight,'' Ms. Boas says. "None of us can do without food, and few of us in this day and age can operate without credit. So kids really need to learn how to control it.''

But they don't learn if they have to go to their parents with a request for money every time they want something. "Allow them to learn. Money management is one of those things we learn from experience.''

Alternatives To Credit Cards

* Debit Cards

* Prepaid long-distance calling calls

* Sending e-mail instead of making long-distance calls

* Checking account in which parents deposit monthly funds