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This is a guest post from Mr Credit Card of www.askmrcreditcard.com. Mr Credit Card reviews credit cards and today he is going to talk about things that students do not understand about credit cards. For full disclosure, Mr Credit Card uses the Plum Card from American Express as his official site business credit card.
Last week, I hung out at a friends house and his kids college friends were hanging around. We chatted a little and when they found out that I ran a credit card review site, they started asking me some questions. It was then that I realize that many students are so ignorant about simple (to me anyway) basic finance and credit card terms that I thought I would address them here.
Thinking that paying off minimum balance is good enough – Some of the college students asked me things about minimum payments. Many of them simply thought that all they had to do was to pay off their minimum payments and everything would be fine. That was their concept of using credit cards – which is to pay for something you do not have enough money for and just paying a fraction back every month. I then took out a calculator and showed them how much interest they would be paying if they just paid the bare minimum and how long it would take them to pay it back. Many of those college kids were shocked and vowed never to carry a balance again!
Having no idea of how much they are spending every month – Aside from not understanding about the concept of pay in full and carrying a balance, most of the college kids around the table did not know how much they spent. They said they kind of have an idea, but cannot pin down exactly how much they spend each month.
Not aware of rewards – Many of the college kids are not aware that credit cards have reward programs. When I explained to them what reward points were and that they could earn cash back rewards, they were shocked.
Many are not aware that proper use of credit cards can build a credit history – The college kids I talked to had no idea about building a credit history. Yes, they have probably heard about FICO scores or freecreditreport.com, but most are ignorant as to how to build a credit history and what they have to do to get a good score. They do not know what constitute a good credit score. They cannot name the three major credit bureaus.
No idea of when they will pay off their college loans – Many of them also have no idea as to how they are going to pay off their student loans. All they know is that they are stuck with a bunch of loans and that have to be repaid. I guess most are living day to day and trying not to worry too much money matters (at least for now).
Some have already gotten into credit card debt – I guess this is the saddest part of the night. Which is that some of these kids have gotten into debt on their college student credit cards. They are even asking if there low apr student credit cards to transfer a balance!
It is a sad state of affairs that most college students do not understand basic financial matters like credit cards and yet they are all using them! At times, their lack of knowledge is simply mind boggling. But on reflection, I do not blame them. After all, how many parents really teach their kids about money? How many schools actually have classes on “money” and “finance”? Hardly. So why should I be surprised at what I heard over at my friend’s place? But this incident certainly made me want to teach my kids about money. Which leads us to the second topic I want to discuss. And that is I think the goal of a student when he or she gets a credit card should be to be a deadbeat (ie someone who pays their bills in full every month).
And since it is back to school time again, so it would seem to be the appropriate season to discuss student credit cards. On the face of it, there are few reasons that a student would want a different credit card than anyone else Like all other credit card users, one’s choice of credit card should be dictated by how he or she will use it.
Ultimately, all credit card users are one of two types, revolvers and deadbeats. This is the industry slang for those who carry a balance, the revolvers, and those who do not, the deadbeats. The revolvers see credit cards as a method of finance. They look at the world as a series of monthly payments, so that $25 a month for a few years seems like a much better idea than coming up with $150 now.
Before they know it, they have fallen down a slippery slope where they keep making large purchases that incrementally extend their monthly debt payments to the point in which they become unaffordable. Before they know it, most of their payments are in the form of interest, fees and penalties, and their credit is ruined by the time they need it most, graduation.
Deadbeats are one step ahead of the game. They know that monthly payments on debt are just a way to spend more on the same thing. They do the math and see that they are selling out their future income for a fraction of it’s value. They may even have some appreciation of the challenges they will face once they graduate and may have student loans, car payments, and difficulty finding the high income job they were hoping to land.
The worst part about the revolver versus deadbeat divide is that once a young person joins one camp or the other, they tend to stay their for life. That is fantastic if you a student becomes a deadbeat, but the data suggests it is extremely difficult for revolvers to pay off their debt for good, and join the deadbeat club for the long haul.
What Should You Do
The primary goal of any parent should be ensuring that their son or daughter becomes a deadbeat. Although one of the many advantages of becoming a deadbeat is that reward credit cards become worthwhile, what I believe is that a reward credit card will send the wrong message to a student. The clear implication of a reward card is that you are rewarded for spending more money, precisely the opposite lesson that a student should be learning.
The purpose of having a student credit card (here are more choices for students) should be to teach students the habits of budgeting, controlling spending, and reliably paying their bills on time and in full. I would council parents to pick a simple credit card that offers low fees and good customer service. I would want such a credit card to offer customers the opportunity to pick their payment due date, so that it is easy for both student parent to ensure that bills are paid on time. A great student card will have a simple to use web site that both parent and student can use to monitor spending. A web site is important as students have holidays, summer breaks, and roommates sharing mail boxes that can make receiving a paper statement unreliable.
Choosing the right student credit card is a great first step towards learning one of the most important lesson that is almost never taught in school, making responsible personal finance choices.