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College Students – Prepare Your Credit For The Real World

Today’s guest post is provided by Ed O’Brien. He is an expert writing in all things pertaining to personal finance, specializing in credit repair. For more of his articles, visit his blog:

A 2009 study by Sallie Mae revealed that the average college senior has $4,100 in credit card debt and 85% of college freshmen carried a credit card balance with only 17% of college students paying their credit card balance in full every month. Credit card debt can be disastrous for college students who typically don’t have the income to pay for a credit card every month on top of living expenses and junk food.

Credit Cards vs. Student Loans
Unlike student loans — where your payments don’t typically start until six months after you graduate — your credit card bills will be due within weeks of spending. While you’re out looking for a job, you still have to make your credit card payment, which could be as much as $100 on a balance of $4,000.

Protect Your Credit and Stay Out of Debt
The first few years after college graduation are some of the toughest years of your life. While you’re trying to get established in the real world, the last thing you need holding you back is extra credit card debt and a bad credit score. So it’s important for you, as a college student, to protect your credit and stay out of debt.

The biggest thing you can do to avoid credit card debt is avoid charging a balance you can’t afford to pay off at the end of the month. Contrary to what you’ve probably grown up believing, credit cards aren’t for purchasing things you don’t have the money for. If you charge something you can’t afford to pay for, you then risk missing your credit card payments and dealing with a slew of negative consequences.

When you miss a credit card payment, the credit card issuer charges you a late fee that’s equal to your missed payment or $25, whichever is less. Late fees can’t exceed $25 (or $35 if you’ve been late previously within the past six months), but when you’re a college student with limited funds, $25 is a lot of money to send to a credit card issuer on top of your regular minimum payment.

If you miss your payment by a couple of days, make it as soon as possible. When your payment gets more than 30 days late, the late notice goes on your credit report and can impact your credit score. Your credit report is a document that includes all your credit payments habits and your credit score is a numeric evaluation of your credit report. Businesses like creditors, lenders, insurance companies, utility companies, and apartment landlords use your score to make decisions about you. When you miss credit card payments, your credit score drops and these businesses are more likely to turn you down.

Your credit score is based on five factors — your payment history, amount of debt you’re carrying, age of credit history, types of credit you have, and applications for credit. The two biggest things you can do to protect your credit while you’re in college is pay your credit card bills on time every month and keep your balances low — less than 10% of your credit limit is best.

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Credit Card Debt & College Grads (video)

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Paying For College Tuition With A Credit Card

creditcardsAny of you that have been following this blog probably already know where I stand in regard to paying tuition expenses with a credit card. The quick answer is never to do it. I don’t care how enticing it may be, a credit card is probably the worst way to finance your education (even worse than a private loan).

That being said, over the years I have met a number of families that consistently pay their tuition bills by credit card semester after semester. The difference in their situation is that they pay their credit card balance off each month out of savings or discretionary income. You may wonder why they do this and outside of the convenience factor the sole reason is to get points for air miles, cash back dividends, or some other benefit their card is providing them each time they use it. For these families, it would not be uncommon to see them charge $15,000 a semester on their credit cards. That is a lot of air miles!

The families I have spoken with say that they use the air miles to fly their son or daughter home for winter break, important holidays, or for the summer. Others say that they use the cash back bonuses to cover textbook expenses accrued during the year. Whatever the motivator, they have tapped into a way to actually benefit from paying a large tuition bill that they would have to pay regardless.

What most of you may or may not know though is that colleges and universities across the nation are making a movement to no longer accept credit cards for tuition payments. At the very least, they are entering into contracts with third party payment processors that are accepting your credit card payments but charging you a “convenience fee” for the transaction. With these fees hovering around 3%, you can see that any benefit (air miles, cash back, etc.) is no longer a benefit.

The initiative for colleges and universities to stop taking credit cards is simply a matter of cost. Every time a school accepts and processes your credit card payment they are charged a merchant fee by Visa,Mastercard , Discover, American Express, etc.. The merchant fee is usually around 2%. That does not sound like a lot but for a school processing $100 million dollars in tuition revenue this merchant fee could add up to $2 million dollars. Seems like a lot of cash just to be able to accept credit cards. For the colleges that don’t take credit cards or are making the switch to not accepting cards, I am hopeful that they will use this extra surplus of cash wisely and put it toward scholarships. My guess though is that each school will probably use the savings to fill any gaps in their budget.

Now for the “Silver Lining”

Legislation is adrift, and hopefully hitting the ground soon, that will minimize the amount of merchant fees that Visa, Mastercard, Discover and American Express can impose on educational institutions and not-for-profit organizations. This legislation is in the very early stages but appears to be gaining support. The big question is if this change in fees will promote more schools to accept credit cards or if the legislation will just be a way to provide additional savings to income stricken colleges and universities. I guess time will only tell.

As for air miles, cash back bonuses and the like, if this legislation goes through I can almost guarantee you that these benefits will not apply for any transactions taking place at fee reduced organizations.

So.. for now… pay with a credit card if your school accepts it and you get some sort of benefit from doing so. However, if you can’t pay your credit card balance off each month, you should definitely exhaust all other options before choosing this route.

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Should You Help Your Student Get a Credit Card?

Philip Laube is a CPA in Ohio and the current Asst Vice President for Business and Finance for Muskingum University. He has a Masters in Information Strategy, Systems and Technology and publishes information on personal finance, technology and other issues both on Muskingum’s website and via twitter as phillaube. We are pleased to have him as a Contributor on

Should you help your student get a credit card? – This is a new question that parents can ask themselves beginning this year when they send their child off to campus. New rules that went into effect in 2010 make it tougher for students to get a credit card.

CreditCardChart1It used to be that credit cards were one of the (many) fears a parent had about sending their child to live on their own. It wasn’t without reason, a study released by Sallie Mae in 2009 showed that 84% of undergraduate college students had a credit card and half had 4 or more credit cards. The average debt on those cards was $3,173 and over 12% had a balance over $7,000. That’s a lot of debt to add to student loans and other obligations.

Beginning in 2010 it’s going to be harder for students to get a credit card. People under 21 now need to have a co-signer for a new card unless they can show that they have sufficient income to pay for the charges on the card. It’s harder to apply as well. Telephone applications are no longer allowed and the gifts some card companies used to pass out for credit card applications are no longer allowed.

So is it good to have a credit card? I have been talking to college students about personal finance issues for a long time. In all these years, I’ve not advised the students to avoid credit cards. I’ve instead tried to educate them about how to use credit cards responsibly. We’ve heard the horror stories about how credit CreditCardChart2cards get some in trouble. But, credit cards are an excellent way for a young person to build a good credit history. They have other advantages as well. They are safer than carrying cash and have other advantages as well. Credit cards can be a great way for a student to pay for books and other necessities. It’s also a good emergency loan should the student need cash for an unforeseen car repair or similar situation.

The key is to use them responsibly. I always advised the students to treat the card as if it were cash. That means that if they knew they didn’t have the money in their bank account to pay for the purchase, then they shouldn’t buy it with a credit card either. The key is to make sure that a new credit card user knows how the cards work and that the credit card has a reasonable limit to prevent spending into a deep hole.  There was a public service campaign a few years back that maybe had the best advice – just “keep it in your pants”.

Some useful links:

Sallie Mae report on credit card use

Financial Fitness Ohio

New credit card act brings changes for students

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