Credit Card and Debt Management By Aaron J. Lewis, Graduate Assistant, Urban Affairs Unit

As everyone gets ready for spring and summer travel, we see an influx in credit card use. Learning how to manage credit and credit card debt is important to establishing a good credit history. For many people debt is an inevitable part of life. The average family in the United States carries a credit card debt burden of $4,000 and the average for college students is equally as high.

Many times credit card companies prey on college students. They are aware that students are ready to make the most of their college years and assert their independence, so they offer them credit cards everywhere they go. Students figure: I will live like I want to now and then when I get a job I can pay them back. Often that money is not paid back and they leave school in debt with thousands of dollars piled on high-interest credit cards. Lower-than-expected salaries, plus higher-than-expected living expenses and hefty student loan payments, make handling credit card debt more difficult for students and recent grads. The average undergraduate student amasses $2,200 in credit card debt according to Nellie Mae, the nation's largest distributor of student loans. The average dollar amount more than doubles for graduate students at $5,800.

Still, credit card debt is often the most brutal sort of debt with high interest rates, compound interest calculations, and revolving credit. Most credit card consumers keep on acquiring debt even as they make payments. The matter of compound interest means that an individual who makes only minimum payments on an average credit card with an average interest rate between 17-21 percent ends up doubling their debt rate every four years. It is inconceivably hard to get ahead of credit card debt. It is exceptionally easy to fall into the cycle of "buy now pay later" credit card convenience.

Here are a few tips for establishing a good credit history:

Map out a spending plan: Making a budget is the best way to manage money over time. List sources of income, loans, money from work, cash for family and friends, tuition, books, and groceries.

Go slowly: Get one or two cards with a low limit and use it responsibly before considering getting another. Paying your bills on time every month is what matters. Your goal is to establish a solid payment history and build credit.

Use credit cards wisely: Credit cards should be used in emergency situations. Avoid using credit cards for small purchases, such as sodas and snacks.

Set your own credit line: Call your credit card company and request your credit limit be lowered.
Avoid cash advances at all costs: Taking out a cash advance on your credit card when you're in a money crunch is a really bad idea. You will pay an upfront fee of 2-4 percent on the amount you withdraw and you'll be stuck paying a high interest rate.

If you want to build credit and are a little afraid of tackling a credit card, you may opt for a secure credit card or a debit card. These cards work more like a bank account with overdraft protection than a credit card. These cards have a MasterCard or Visa logo, allow you to make withdrawals at automatic teller machines, but can also be used like a credit card. A "secure card limit" is really just a bankcard that is accepted like a credit card. When you use a "secure" credit card, it is pretty much the same thing as writing a check only the amount that you "charge" comes out of your banking account immediately.

Parents have the ultimate say in what their children learn and how they learn about credit. The best thing that parents can do is talk to their children about money and credit. Parents are encouraged to talk to their kids about handling debt wisely before they head off to college. These fundamental concepts of money management can start as early as middle school. At this age, most kids are ready for abstract concepts. Parents can begin talking about compound interest, how it works for you when you're saving money, and how it works against you when you borrow. Once your children get to high school it is time for actual money management. Encourage your child to open a checking account. This will teach your child how to write checks, reconcile a bank account, avoid overdrafts, and deal with bank fees. If your student has learned the basics of money management, then go one step further and teach them about annual fees, annual percentage rate, card penalties, and grace periods.

Remember, your goal is to establish a good credit history. This may take time, but with proper preparation it will be a reality. The basic fundamentals of money management are important to succeed. Once you master those skills, the rest is simple. Simply work, prepare, and get ready. You are on your way to a better concept of credit.

References

CreditCards.com. (2006). Student credit cards 101. Retrieved March 31, 2006.

Lazarony, Lucy. (2006). Many college kids not making the grade in money management.
News and Advice. Retrieved March 31, 2006.

Nellie Mae. (2005). Money managing tips for undergrads. Tips for Undergrads. Retrieved March 31, 2006.

Nellie Mae. (2005). Are you ready for a credit card? Credit Card Tips. Retrieved March 31, 2006.

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