As college students start the academic year, they should be prepared to learn lessons that go beyond the classroom. One subject they cannot afford to fail is Personal Finance 101, according to the Insurance Information Institute (I.I.I.).
“A college education is a smart investment,” said Jeanne M. Salvatore, senior vice president and consumer spokesperson for the I.I.I. “But as college grads enter the workforce, their credit history will impact their lives every bit as much as their college record does. How a student manages credit cards, student loans and everyday expenses is an important part of the college learning experience. Students need to be able to hit the books and balance their checkbooks at the same time.”
Seventy-six percent of all incoming freshman will already have a credit card when they arrive on campus, according to Nellie Mae, a leading provider of student loans. And most undergraduate students will have four or more cards by the time they graduate. In fact, most students carry an average credit card balance of nearly $3,000 during their final year of college.
“A person’s credit history begins with a first credit card,” said Linda Golodner, President of the National Consumers League. “Most young people are surprised to learn that their credit history will affect them for the rest of their lives—whether or not they will be able to rent an apartment, finance the purchase of a car and even get a job.”
Parents and students need to work together to develop a financial plan for college and a budget. Specific educational expenses, including tuition, room and board, books and fees, can be viewed as “good debt” and can be covered through student loans and grants if necessary. Day-to-day spending, including personal needs, transportation costs, telephone and other incidentals, is the type of expense that students often charge on credit cards, and can add up quickly.
Consumer debt is much more expensive and needs to be carefully monitored. Carrying high, unpaid balances is one of the quickest ways to incur too much debt and fall behind in payments. If college students plan to use a credit card regularly, they should have clear limits and know ahead of time where the money will come from to pay the bill at the end of the month.
“In most cases, college is the first opportunity for young people to make independent financial judgments,” pointed out Salvatore. “They are preparing for life, but in the process, they shouldn’t be digging themselves into a financial hole that will engulf them for years afterwards.
When deciding on a credit card, students should read the fine print and shop around for the best terms. Look for a card that:
- Has an annual percentage rate at or below 15 percent
- Offers a grace period of at least 25 days
- Features no annual fee
As students use credit cards and start paying other bills, it is important to check credit reports. By law, consumers are entitled to one free credit report from each of the three reporting agencies once a year. Students can request their free annual credit report from the only online authorized Web site, AnnualCreditReport.com or by calling the toll free number 1-877-322-8228.
To develop good financial habits, the I.I.I. suggests that students:
- Learn to stick to a budget. Understanding how much you have to spend, and establishing and living within a budget are important skills to master.
- Pay bills on time. Promptly pay all bills, including payments due on loans and credit cards. This will help to build a strong credit history. A pattern of late payments not only lowers your credit and insurance scores, but late fees and interest payments can add up and make it harder to pay down the balance.
- Use credit responsibly. Remember, credit is a loan—one that will need to be repaid with interest. Monitor monthly bills and make spending adjustments accordingly. Also, avoid spending up to the limit on credit cards. It is a good idea to have credit available for emergencies.
- Keep in touch with creditors. If you are moving residences, or leaving campus for the summer, do not forget to tell your financial institutions. Bills lost in the mail can result in a black mark on your credit report. Fortunately, most students on campuses today will have a computer, which means they can take advantage of electronic billing and payment.
- Consider credit counseling. Those who find themselves in a financial bind should consider credit and money counseling. Information is available from the National Foundation for Credit Counseling or the American Center for Credit Education. Students can also take advantage of the many financial literacy programs offered by colleges and universities.
For additional information regarding credit, contact the Consumer Data Industry Association or go to MyFico.com to get a copy of your credit score.
For more information about insurance, go to the I.I.I. Web site.
