The debate about whether or not college students should open a credit card account is a long and heated one. The advocates of this practice are adamant that, if used responsibly, a credit card will help and individual build a positive credit history. Their opponents believe that entrusting a college student with a credit line provides a too-tempting situation for the student to misuse the credit. Here, we examine both sides of this argument with a true story* about two sisters who used their credit in different ways. (*names and some details have been changed to protect privacy)
Susan and Kate are sisters, born two years apart. They look so much alike that people sometimes think they are twins. The similarities end there. Susan went to a large state university, pursuing a degree in Chemistry. Kate opted for a small, private liberal arts college and decided to major in English. Both sisters signed up for a credit card targeted at college students during their freshman year.
Susan worked on campus part-time to pay for living expenses that her scholarships didn’t cover. She began using her credit card with the intent of charging only her groceries to the credit card and paying off the balance at the end of each month. After a year of this, she was offered a credit card that offered cash back.
Susan then increased the items she was putting on her credit card until she was putting all chargeable expenses on it. She was meticulous in making sure that she did not spend more than she could pay off at the end of the month. Not only was she not accumulating debt, she was making a small amount of profit on the cash back.
Kate also worked a part-time job to pay for her expenses. She signed up for the credit card to use in case of emergencies. It didn’t take long for her to decide that a sale at her favorite clothing store combined with a lack of funds in her checking account constituted an emergency. Within the first year, she accumulated over $1000 in credit card debt. That first summer, she stayed with her parents and worked full time to pay off her debt.
Kate, however, hadn’t learned her lesson. She continued to use the card irresponsibly and racked up a $3000 credit card bill during the next year. Months of missed payments had resulted in monstrous late fees. In addition to working during the summer, her parents also contributed $1500 to bail her out of debt.
After graduation, Susan was able to obtain a great rate on a home loan. She has a credit limit of $20,000, but still only charges what she knows she can pay off at the end of the month. Kate moved in with her sister with $8000 in debt. She didn’t even have good enough credit to rent, much less buy a house or car. Susan shredded Kate’s credit card when she moved in. Kate is still working on paying off her credit card debt.
When college students take the plunge into the world of credit, they must understand that whether they sink or swim depends on their spending habits. If the credit card is used responsibly and the money is well managed, it can improve your quality of life. If used irresponsibly, you will drown in debt.