Why I paid $120 for a pizza
Oct 09 '00 (Updated Oct 15 '00)
When you get to college, you will be tempted by the dark side... "6.99% introductory rate!" "No annual fee!!" The reality? You will run the very real risk of getting hopelessly lost in debt, running up huge credit card bills, losing the ability to make payments, and damaging your credit. How do I know? I've been there.
HOW IT BEGINS...
The credit card companies' seduction begins in high school. My brother is 16, and legally unable to get a credit card, yet he received an application addressed "To the Parents of..." last month. Why? He registered for the PSAT, and the credit card companies buy lists of names of students who have registered for the exam. This is brilliant on their part -- students who take the PSATs are more likely to attend college. Students who attend college are more likely to make more money upon graduation and have parents who will be more likely to bail them out if they run into credit problems.
Credit card companies have become much more predatory in recent years. When I graduated from high school in 1993, I do not recall seeing any credit card applications until I began college. Today, my brother's friends all report having their own cards. Much of the blame can be put on their parents' shoulders for not forbidding their children from acquiring credit at such a young age. Regardless of their maturity, most high school students do not have the discipline to police their spending when they are still in high school. The temptation is too great, and the rewards are too high.
Credit card companies know that young students are more likely to run up excessive balances. In addition, students tend to be loyal to their credit card companies after graduation. Like giving candy to a baby, these companies will do anything to lure you in and make you a customer for life.
...BUT THEN THE STAKES GET HIGHER AND THE PRESSURE INCREASES...
The real problems occur once you arrive at college. From the first moment you are on your own, after you have waved your last teary goodbye to your parents, and after you have made nice with your new roommate, you are besieged with credit card applications. At the University of Pennsylvania, there were two applications put in the bag with every purchase from the bookstore. Companies set up tables outside of student centers promising quick approval, easy sign-up, and usually a t-shirt or some cool trinket. I think I remember signing up for a credit card that was giving away a camera when you signed up with them. A camera! The fools, I thought. Guess who is laughing now? It has been seven years, and I now owe that company $5,600!
I have been there. The temptation is overwhelming. For many, college will be the first time that they could not rely on their parents for food. Or spending money. Or gas money. Using myself as the perfect example, I worked in high school, but just for some extra cash for "fun stuff". It is a very different issue when you are in college and you have to scrounge for pennies to buy Ramen noodles at the local market (by the way, they are terrible for you! 16 grams of fat per package!). I figured I would sign up for one card, since having a credit history is good, right? One card couldn't possibly hurt.
... TO THE POINT YOU BEGIN TO DROWN...
Well, needless to say, I became out of control. I am not alone! The average student graduates with over $5,000 in credit card debt. I am proud to say that I personally skewed the statistics by graduating with over $20,000 in debt, but that is another story.
The typical scenario goes like this: at first, students are careful with their spending. They don't want to run up their balance too soon, for they know that their minimum payments will drastically increase. Then the first few bills begin to roll in, and the reality sets in that you can buy stuff without really having to pay for it! My $40 purchase at Tower Records? I only have to pay $5 for it in the minimum payment! Slowly but surely, the credit card is used more and more frequently for larger and larger purchases. That $5 minimum payment? It's now up to $50, but it is still manageable. Fact: Gerri Detweiler of Debt Counselors says that by sticking to minimum payments, it would take a student more than 12 years and $1,115 in interest to pay off a $1,000 bill on a card with an 18 percent annual rate.
Eventually, the minimum payments become a little too high, and you will start to have problems keeping up. Plus, your introductory six-month period for the "teaser" interest rate is up, and it is now up to 17.99%. Your best bet (at least in the typical college-student rationale) is to transfer the balance to another credit card that is offering a great transfer rate. Fact: In the June 2000 bankrate.com(sm) survey of lenders that offer student credit cards, the average rate came out to 17.51 percent, about a half a percentage point above the average for all variable-rate cards.
You begin to drown in debt, and it is a very slippery slope. As you continue to carry balances, you are charged more and more interest. The more interest you are charged, the higher the minimum payment. The higher the minimum payment, the more you have to pay each month, which eats into your available cash, which leads to charging more....
I SAY THIS WITH AUTHORITY, BECAUSE THIS IS WHAT HAPPENED TO ME AND MANY CLASSMATES OF MINE IN COLLEGE.
By the time I hit my senior year, I was thinking that I was home free! Yes, I owed tens of thousands of dollars to ten (10!) credit card companies, but I was going to get a high-paying investment banking job, right? Sort of. Although I got the job, I have not been able to knock down any of my debt. Why? Taxes. It sounds stupid and obvious, but I lose over half of my gross pay to taxes and benefits. Toss in rent and my car payment, food, insurance (don't forget that you will have to pay for your own medical, dental, car, and renters insurance once you graduate!, and it leaves me with exactly the amount of my minimum payments each month. I have no savings, I am about to liquidate my 401(k) for cash, and I think I am going to have to sell my car. Why? Credit cards in college.
AS A FINAL WARNING:
Never, ever, ever skip a payment! Even if you don't have enough money to pay your credit card bills, call the companies and work out a payment schedule. To quote bankrate.com, "be aware that one late payment and the rate, whether it's during an intro period or not, often will be jacked up to 20 percent or more, and there will be a hefty late fee to boot." This does not even take into account the damage late payments inflict on your credit report. Why should you care? Because your credit report is what determines whether or not you will be able to rent an apartment, buy or lease a car, get the best rate on car insurance, get a job, and, yes, get additional credit cards.
YES I AM ALMOST DONE... :)
I am a very extreme example. Very few people are as foolish as I was in college, treating credit cards like play money, forgetting the consequences. (Very few people also have a mooch for an (ex-)fiance who never paid for anything for himself or for you in five years, but that is off-topic)
However, I have read many articles warning college students about the dangers of overextending their credit at such an early age and I wanted to lend my two-cents (on credit, probably) to the cause.
That pizza I bought sophomore year? I am probably still paying for it (hence the $120 estimate). Bankrate.com's article on college students and credit cards had a great quote:
We have a rule of thumb for kids who say they need a card for
emergencies. If you can eat it, drink it or wear it, then it's not
an emergency.
On the plus side, having a credit card with a low credit limit ($1,000 or less) can be a great start on your credit history, provided you always pay on time. However, I must caution you that many credit card companies will automatically raise your spending limit once you begin to approach it so that you will continue to spend on their card. Be judicious with your purchases, never pay with credit what you could conceivably buy with cash, and try to pay the balance off each month. It teaches terrific financial discipline, you will never be charged interest, and you won't wind up like me.
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