Youth and Money
Easy credit can lead to harsh realities
BY
MARIANNE ARMSHAW
marmshaw@bellsouth.net
Sunday 03.28.04
Without care, students can find
themselves overburdened with credit card, cell phone and long-distance bills.
Along with a dorm room and the right to party without
parental curfews, freshman year at college
can bring other adult experiences. Serious
debt among college students looms as a growing problem with a surprising number
of undergraduates earning failing grades when it comes to managing money and building
a good credit rating.
At orientation, a new student will find offers for
credit cards, cell phones, long-distance service for the dorm room and car loans.
The credit is easy to get and often comes with gifts
like a free T-shirt or beer mug for incentive. Yet that easy credit can morph into
hard knocks when debt piles up. Some cards carry interest rates of 23.9 percent
or higher.
"When students run up a balance that can't be paid
off, many make the mistake of making just the minimum payment," says Professor Young
Baek of Nova Southeastern University's H. Wayne Huizenga School of Business and
Entrepreneurship. "That digs them deeper in debt."
The problem compounds when the undergraduate borrows
money at a higher rate to pay off preexisting debt.
"That higher rate makes the new debt even more expensive.
The student falls behind and eventually can develop serious debt problems," Baek
explains.
In fact, some students face such crushing debt that
they are seeking credit counseling -- and in some cases bankruptcy -- before they
can even graduate and begin chipping away at that mountain of student loan repayments.
According to Robert Manning, author of
Credit Card Nation: America's Dangerous Addiction to
Consumer Credit, the percentage of college
students with four or more credit cards jumped from 27 percent in 1998 to 47 percent
in 2001.
During the same period, median student card debt
rose from $1,222 to $1,770.
And the amount of card debt rises with each year
the student advances through school. Last year, the median card debt for freshmen
was $901. Seniors averaged $2,185.
According to the U.S. Department of Education's
National Center for Education Statistics, 41 percent of graduating seniors had credit
card debt, with the average balance just over $3,000. Among students who had college
loans, the number with credit card debt rose to 48 percent and the average balance
was $3,176.
Meanwhile, the cost of education goes up, while
the current likelihood of finding that high-paying job supposedly guaranteed to
anyone with an undergraduate sheepskin continues to defy gravity.
More than half of college graduates reported owing
between $10,000 and $40,000 in student loans, with the average debt increasing to
$20,000 from $17,000 last year.
That's what happened to former Floridian Toni McCarthy.
Now 26 and trying to work off $17,000 in consumer debt and $25,000 in student loans
she accrued as an undergraduate, McCarthy used high-interest credit cards to cover
living expenses and other costs.
She kept current with payments, but rarely managed
to pay off her balances for long. When the low-paying jobs she found after graduation
barely covered her living expenses, she fell farther behind. Late feels added to
the debt spiral.
"I'm working with Consolidated [Credit Counseling
Services] to try to pay it off. But I have to tell you: I am also considering bankruptcy,"
McCarthy says.
McCarthy has moved to Ohio to live with her parents and works the best job she can find: night shift at a convenience store for $8 and
hour.
Her advice: "Stay away from the credit card offers.
If you can't pay it off every month, you will get stuck with a big balance you can't
pay," she warns.
What about cell phones, car loans and other bills?
When students pay them late or fall behind, they blacken the credit rating they
will need to apply for favorable-rate mortgages, loans and, yes, credit cards.
Enough late or skipped payments can add up to a
decade or more of expensive, hard-to-get or even denied credit.
Late fees and charges for exceeding a credit limit
add to the debt and often automatically ramp up the interest rate to the highest
allowed by law.
It's never too late for consumer education. Parents,
prepare your child for responsibilities before orientation delivers those alluring
credit cards and services, advises Howard Dvorkin, president of Consolidated Credit
Counseling and certified public accountant.
Dvorkin sees the troubling drift toward ever-higher
debt incurred at younger and younger ages.
"Credit is a loan. It is real money that you must
repay," he explains.
His advice: Do your homework before deciding whether
you need a credit card. If the card is for emergencies only and spring break expenses
wind up on your bill, clearly there is a problem.
His other advice:
Study your card agreement closely and always read the fine print fliers. The issuer usually can change the terms at will with 15 days notice.
Try to pay off your total balance each month. Paying the minimum is a trap: If you pay off a $1,000 debt on an 18 percent card by sending in the minimum each month, it will take more than 12 years to repay
At the first sign of credit danger, such as using one card to pay off another, make the card harder to use. Only carry it when you plan to use it, or entrust it to your parents.
