Wednesday, October 1, 2008

Building A Credit History Responsibly & Avoiding Plastic Debt

College is a time for revelations. Some will choose political affiliations, others will fall in love and most will learn rather quickly that registering for classes before noon is a recipe for disaster. As these young men and women embark on their post-secondary years, there is one realization that trumps all others: They are broke.

Sure, you have a meal plan furnished by your parents, but you soon realize that it’s not so easy to finance late nights out and “accidental” shopping sprees. Unfortunately for most college students, the solution to this problem does not lie in acquiring part-time employment or even cutting back on the extra expenditures. In reality, the modern solution has become the credit card, leading many young people today into premature debt and financial chaos.

According to Jim Pavia, editor of InvestmentNews, “Studies show that college students seem to be living in some sort of suspended reality or state of denial about their financial circumstances.” If you combine this notion with the marketing tactics employed by credit card companies, you reach a pretty scary conclusion: a college freshman is offered eight credit cards in his or her first semester and at graduation time will have an average of 6 credit cards.

Many financial professionals cite a vicious cycle in which students max out multiple credit cards, often with “expenses that are unrelated to education.” These expenses add up and the figures show it: 25% of college students graduate with over $5,000 in credit card debt. According to Anna Maria Andriotis of the Wall Street Journal, all it takes is “one reckless night of spending and one late payment [to] leave students with overwhelming debt and a damaged credit score – which could hurt their chances of landing a job or an apartment after college.”

It is apparent that college students are not using credit wisely, but that is not to say that they should not be using credit at all. When graduating, a sound credit history will be required when leasing an apartment or buying a car. As with most things, the key is to practice responsible money management. Here are some tips that may help you avoid damaging your future financial prospects:

1. Go Without the Free Swag: Many credit card companies offer gifts or special offers in hopes that you will sign up for a card. According to a survey by, this often works: 4 out of 10 consumers sign up for a credit card to receive a free gift or special offer. When thinking about signing up for a card, visit websites such as to compare offers. That free I-Pod will not do you much good when you find yourself struggling with debt on an entry-level salary.

2. Watch Your Credit Limit: Most credit card companies will afford you a limit between $500 and $2000. According to Steven Katz, Director of Consumer Education at, maintaining a balance that is less than half of your available credit should help you preserve a solid credit score. While it is preferable that you pay your bill in full each month, you should at least adhere to this rule of thumb.

3. Beware of penalties: Perhaps the easiest way to get sucked into the cycle of credit card debt is the penalties that are written in the fine print of your credit card contract. Late payments can cause your interest rate to increase dramatically. Some credit card companies even practice “universal default.” The inclusion of this clause in your contract allows your creditor to penalize you for any late payments made on cards that you have with other lenders. For these reasons, it is absolutely imperative that you read the fine print and also avoid making late payments.

4. Be Smart: The above tips are specific ways in which you can guard against credit card woes. However, it is ultimately up to you to practice responsible behavior. College is an exciting time and many young people make impulsive decisions regardless of the financial implications. Having fun is important, but in moderation. Enjoy the last years of your youth but take care to safeguard your credit history for the future


Anonymous said...

What do you do if it is too late and you've already maxed out your credit cards and are late with payments?

Claire said...

Have you tried credit counseling? You may want to contact the National Foundation for Consumer Credit at 800-388-2227 or at to set up an appointment for credit counseling.