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Credit cards teaching students a costly lesson

Some students burned by card debtN. PALM BEACH, Fla. -- They arrive on campus with spiffy new backpacks and shiny new credit cards, determined to make the most of their college years.
They leave in debt with thousands of dollars piled on high-interest credit cards.

"Students figure: I'll live like I want to now and then when I get a job it will be easy to pay it back," says Gerri Detweiler, education Adviser for Debt Counselors of America. "Often, it's not."
Lower-than-expected salaries, plus higher-than-expected living expenses and hefty student loan payments, make handling credit card debt all the more difficult for students and recent grads.

Card debts average $2,200 for students
The average undergraduate has $2,200 in credit card debt, according to Nellie Mae, the nation's largest maker of student loans. That figure jumps to $5,800 for graduate students. Since so many student credit cards have high annual percentage rates, the longer these youngsters wait to pay the cards off, the worse it gets.
Detweiler points out 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.
If students fall behind in their payments, they get slammed with high late fees. And it's easy for things to get out of hand.

Paying on cards for years and years
Sophia Jackson, a personal finance counselor for Consumer Credit Counseling Service in Durham, N.C., says one of her student clients made an $82 credit card payment on an overdue bill, only to discover that a mere 79 cents of the payment applied to the card's principal. The rest was eaten up by late fees and over-the-limit fees.
"In that scenario, you could pay on your balance for years and years and your balance would keep going up," Jackson says.
She adds that many of her clients are students from area schools like the University of North Carolina, Duke University and North Carolina State.
"It's absolutely epidemic the debts I see with young people," Jackson says. "It follows them into their 30s and 40s."

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Card debt hurts student loan repayments
High credit card debt also affects a recent grad's ability to pay student loans and to obtain other credit. The best way to avoid this trap is for students to get by with one credit card that has a low credit limit, and to pay it off regularly.
"One is enough, and you should really try to keep the balance down as low as possible," Detweiler says. "It's not free money."
BankBoston is one issuer that actually caps the spending limits on student credit cards at $300.
"We know how important it is for students to develop good credit, especially when they graduate and are looking to buy a car or to qualify for a home loan," says Diane Greer, a BankBoston spokeswoman.

Credit success starts with parents
Armed with the right information, many students are able to establish credit and steer clear of card debt.
David Sandor, a vice president at Visa USA, says 54 percent of college students pay off their credit card balances every month.
"Most tend to be responsible and use the card wisely," Sandor says. "Some of them don't and they're getting into trouble. If a person makes it through 18 years of life without any financial wherewithal, it's very difficult to change their behavior and that's why it's so important that parents speak to their children about money management."
The key is teaching students money management skills before handing them a credit card. Visa, MasterCard and American Express all have sites dedicated to college students packed with financial tips and information.
"People are not born with an innate ability to manage money," Sandor says. "It's a skill that has to be learned."


The experts at Visa USA suggest these rules for students who want to protect their credit ratings and card privileges:


Take time to establish a monthly budget for yourself, one that includes realistic figures for credit card payments. Monitor your bills and compare them with your budget every month, making spending adjustments when necessary. To avoid overextending yourself, keep your monthly debt obligation below 10 percent of your monthly net income (after taxes). For example, if your net income is $800 a month, your monthly loan payments shouldn't be more than $80. That includes your credit card payment because your card is a loan, after all. Preparing for planned and unexpected expenses is the best way to guarantee that your credit history remains strong and unblemished over time.


How you handle your bank accounts and other responsibilities may affect your credit worthiness, so the best way to establish a credit history is to "exercise" the credit already given to you. Use your credit responsibly. And be especially sensitive to the payment agreements you made when you established your accounts.


The credit limit shown on your statement is the maximum amount that the institution that issued your card is prepared to lend you, based on your income and credit history. Avoid spending to your limit. It's a good idea to set aside a portion of your available credit so you have it for emergencies such as car repairs or unplanned medical costs. Although many lenders will consider increasing your limit upon request, a roadside garage is not the most comfortable place to make this call. Spending over your limit is usually considered a violation of your account agreement and may incur additional fees or penalties, or force the freezing or cancellation of your account.


When a bill or Visa card statement arrives at your home, the most important item to notice is the payment due date. Whether you choose to make the minimum payment or pay the total outstanding balance, your payment must reach the financial institution or business by the payment due date. Otherwise, it is considered a late payment and will probably appear as such on your credit history. Late payments can also be more expensive by incurring penalties, extra fees, or additional finance charges. If the account due date consistently falls at an inconvenient time of the month (a week before payday, perhaps) contact the organization to see if it can change your billing cycle, or adjust your budget accordingly.


The minimum payment on your Visa statement is just that: the minimum that the lending institution will accept for that specific month. Always be prepared to make at least the minimum payment. If you wish to reduce your finance charges, or plan to make a number of additional purchases in the coming month, consider paying a larger amount.


If you change your name, address or job notify your lending institution immediately. Your payment could turn into a late payment in the time it takes for a statement to be forwarded to your new address by the postal service. Send your updated information before the fact, not after. Also, contact your lender if you cannot make a payment on your account for any reason. Special payment options or arrangements may be arranged that will satisfy both you and your lender, while keeping your good credit history intact.


-- Posted: June 5, 1998

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