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Illustration of credit cards.
Illustration of credit cards.
Illustration of credit cards.

Should your graduate trust plastic?

Published September 12, 2016.

Credit cards at college.

Some say college can be a dangerous place for students to use a credit card.

Others argue it's an ideal place for young adults to learn how to manage money.

"I've heard students say they had $30,000 in credit card debt," says Don Schoesler, a personal finance instructor for North Idaho College. "If you're making $10 an hour, how are you going to pay that off? You're not."

Despite the horror stories of credit card abuse, national surveys indicate that today's college students are savvier about credit cards than parents may know.

Sallie Mae, the student loan underwriter, surveyed 800 students last year and found:

  • 56 percent of college students have at least one credit card. 
  • 59 percent got their card to build credit history.
  • 63 percent pay the full balance due each month.
  • 73 percent pay the bill without assistance from a parent or other adult.

And 69 percent report an average monthly balance of $500 or less. A separate survey released in August 2016 by Experian, a national credit bureau, reported a higher use of credit cards on campus, but with 72 percent of students saying they pay off their balance each month.

Soon-to-be graduates average about $2,500 in credit card debt, Salle Mae said. That may seem high, but the debt comes at a time when average tuition and fees for one year at a U.S. public university exceeds $9,400, according to the College Board; $32,400 at private colleges.

New federal regulations have helped some students make more informed choices about using a credit card.

The Credit CARD Act in 2009 barred credit card companies from signing up young college students unless the student can demonstrate an ability to make payments or has a co-signer. The law also prohibited offering gifts to students to apply for a card, or striking sweetheart deals with universities to market cards on campus to students.

Yet banks keep trying. They know that college graduates are likely to earn higher incomes and spend more. So, they stuff student mailboxes with credit card offers, with pricy interest rates that range from 19 percent to 30 percent.

"If someone offers you a 23 percent loan, you would probably say, "No way!" Schoesler says. "But for some reason with credit cards, we don't seem to care."

You should care. If you bought $1,000 in stuff at the campus bookstore with a card that charged 30 percent interest, you would have to pay $56 a month for the next two years, or a total of $1,341, to retire the debit. If you charged $5,000 in college tuition, you'd have to pay $130 every month to the credit card company - or a total of $17,211 during the next 11 years! (You also would likely incur a stiff fee from the university for using your credit card to buy tuition.)

"If someone offers you a 23 percent loan, you would probably say, "No way!" Schoesler says. "But for some reason with credit cards, we don't seem to care."

Robin Henager has been researching student loans and finance for years. An assistant professor of economics and finance for Whitworth University's School of Business, Henager says credit cards are not evil, and can be beneficial in an emergency or for small, convenience purchases.

But credit cards are a poor way to pay for tuition, fees, and other long-term investments in higher education, she says.

"There are some good — and not so good things — about student loans, but they are an acceptable way for students who need to borrow for a college education," says Henager. "A credit card is another matter. Unlike a student loan, with its option to defer payments, a credit card can quickly get away from a student if they start using it for tuition or fees."

Henager and other consumer finance experts suggest students practice three things when using a credit card at college:

  1. Only buy what you can pay off each month. That means restricting your credit card purchases to either emergencies or convenience purchases. Never tuition, fees, car payments, or other major, long-term expenses.
  2. Stay under your credit limit (the maximum amount the card issuer lets you borrow.) 
  3. Avoid taking a cash advance on the card, which triggers a fee.

Henager recommends students start with a small credit limit that restricts spending on the card to, say, $500. Parents also could choose to authorize their student to use the parent's credit card, so they can keep an eye on the student's spending habits. Keep in mind, however, that co-signers are liable for bills the student may run up and fail to pay.

Another option for students with no credit history is a secured credit card, where the student or parent puts money on the account in advance. (Sorry, but this card is not currently available at STCU.) That limits your spending to the account balance, yet helps build credit history as spending activity on the prepaid credit card is reported to the major credit bureaus.

After a student graduates, a solid credit score can help him to secure a car or home loan at a reasonable rate, Henager says. It also might boost her chance to get a job with a growing number of employers who screen applicants' credit scores as part of the hiring process.

Schoesler says college students don't have to settle for high-cost cards. He counsels students to put money aside in an interest-bearing account at their bank or credit union, then get a credit card that pays cash back on purchases, with no annual fee. By using your cash in the bank to pay off your card each month, he says, you can simultaneously earn cash back on card purchases and interest on your savings.

"I've gotten $300 to $400 back at end of year by using a cash-back credit card," he says. "Just make sure you pay the bill in full each month, so you're not incurring any interest or fees."

Even better is when families prepare years in advance for college expenses, avoiding a need for high-priced credit cards and student loans. With almost any amount, parents can open a 529 education savings plan at most investment firms. The plan grows with your regular contributions and tax-free earnings when used to help pay for college education.

"The lessons students learn by handling their own money are important," Henager says. "Often we hold their hands too much, but at some point in life, we have to let go and trust them to make it work."

How to choose a college credit card

Don’t flatter yourself. Just because an offer came in the mail with your name on it doesn’t mean you should apply for the credit card.

Rather, if you plan to apply for a credit card, you should research and compare — that’s what college students do! — different cards until you find one that best matches your lifestyle and financial goals.

For example, some cards offer cash back for college students who pay their monthly bill on time. Some give reward points that you can use later for travel expenses. Some give you extra cash for earning a 3.0 GPA or higher during the school year. And some focus on the basics — no annual fee, low fixed interest rate, and a safe credit limit.

Personal finance experts recommend students look for some or all of the following features in a credit card to reduce their cost and risk:

  • No annual fee.
  • Cash back or rewards programs that can be used to buy textbooks or dorm room essentials.
  • Lowest possible rate.
  • Late payment forgiveness.
  • Cards issued by local financial institutions that may be willing to help you in a crisis.

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