Credit Card Debt, another source of student debt to watch out for
Student loans are not the only kind of student debt that most college students have to contend with upon graduation. Credit card debt is another huge factor, and can be the sort of debt that, unlike student loans, an average student can quickly overuse long after graduation. Some even say that credit card debt is the worst kind of student debt.
The Young Americans Center for Financial Education (http://www.yacenter.org/index.cfm?fuseAction=financialLiteracyStatistics.financialLiteracyStatistics) states the following statistics on student debt:
- By the time they reach their senior year, 56 percent of students carry four or more credit cards, with an average balance of $2,864
- In 2007 a Charles Schwab survey on teens and money reported that only 45% of teens know how to use a credit card, while just 26% understood credit-card interest and fees.(4)
- People in the 18 to 24 age bracket spend nearly 30% of their monthly income just on debt repayment - double the percentage spent in 1992 (10% of net income is a recommended amount for debt obligation). (3)
The fact that so many students carrying such a load of debt don't really know what they're getting into is troubling. Blessedly, I learned to avoid the pitfalls early on. I attribute this in large part to a job I had once at a credit card calling center. By learning the ropes, and servicing both stellar and not-so-stellar credit card consumers, I learned, for instance, how easy it is to avoid those $29 late fees, over the limit fees, and many other types. Every student carrying debt should know that they are usually entitled to having at least one of these fees waived, granted their credit card standing is pretty OK. Some companies even have a loose policy of allowing one waived fee a year or so, and, in any event, if you find yourself once over the limit, or late making a payment, you should at least call and ask to have the fee removed "as a one time courtesy."
Over the limit fees are interesting. Many people think that a store will decline a card outright if it's maxed out. This is a mistake. You don't know how many times I had to explain to irate credit card holders that certain monthly subscriptions will still take even on a maxed-out card, or the fact that both restaurants and gas stations will run a nominal charge of a few dollars through before the actual charge posts to the account. What this means to the average credit card holder who is dangerously close to their limit is this: they might have only $10 available on their credit card, and then they go gas up, which costs them $30. The gas station will AUTHORIZE the credit card for only a dollar or 2, and, 2 to 3 days later, once the charge actually posts, bingo: you are now $20 over your limit. And here's a $29 fee for your trouble. The truth is, once you get dangerously close to your limit, you're better off monitoring your credit card expenses the way you'd balance a checkbook, for any delay in the posting of charges will take you over the limit quicker than you'd like to imagine.
But one of the quickest ways a student can get in trouble is by ignoring the fine print on those supposedly great promotional rates that most likely got the student into credit cards to begin with: promotional APR's.
Promo APR's are like the ARM's of the credit card world. They reel you in at a great monthly interest rate (at times even a 0% rate), and then, after the promotional rate is over, say, in 6 months or 3 years, your interest can go as high as an ungodly 25%. It's pretty easy to understand why one should be careful of these, but
balance transfer promotions are the ones to watch out for. These allow you to transfer a big chunk from a higher-interest credit card to a new one at a great rate which is not applicable to any additional purchases you make with the card. The trick is, EVERY PAYMENT YOU MAKE TO A CREDIT CARD GOES TOWARDS PAYING THE AMOUNT WITH THE SMALLEST INTEREST ATTACHED TO IT. This basically means that if you choose to transfer $3,000 into a card at a 2% rate, and then proceed to charge $500 more onto the card at the card's normal 16% rate, you are not allowed to choose to pay off the more expensive $500 before you pay the $3,000. Even if you MAKE a $500 payment, that $500 will go towards reducing your $3,000 to $2,500, and you will still have to pay the 16% on that $500 for the life of the balance. Which means that, if it takes you 4 years to pay off that card, you will basically be paying $167 for the luxury of having charged $500 that one time.
Credit cards are a double-edged sword. They are a great way of living outside your means, but unless you're good at second-guessing the credit card companies or are 100% watchful, you can find yourself way over your head quicker than it takes you to say "annual percentage rate". Abstinence is always best, as many like to say, but watchful monitoring is a close second.