Feature article: Credit
You can’t purchase financial freedom with a credit card
Cynthia E. Crawford, Ph.D., Family Financial Education Specialist, and Rob Weagley, Ph.D., Department Chair, Personal Financial Planning, University of Missouri Extension
An informal survey of students at the University of Missouri and Missouri State University asked them what three things they would recommend to a student that was just graduating from high school and beginning their time at college or university. Hands down, the most popular warning was to encourage young people to avoid credit card debt. Many mentioned that they had not understood that it was not “free money.”
Some days it seems like financial specialists are the only ones cautioning people in their use of credit cards; however, if young peers could speak to each other about this, they would join our chorus.
First, it would be wrong to say that all credit is bad. Credit fuels much of our economy and, if the debt is being used to create wealth through investments in one’s human or non-human capital, it is a tremendous tool. Credit is convenient. Credit cards are much safer to use than carrying a pocket full of cash. Credit can also be the key to solving many emergencies. As such, credit is not bad.
Unfortunately, however, financial problems are the main reason students exit college before earning a degree. Major universities report that more students consider leaving school due to credit card debt than due to their grades!
What causes this? Oftentimes, students report that they are anxious to build their credit history and they think this is accomplished by rushing into indebtedness. What they need to know is that the good credit they are seeking for purchasing a home or paying for graduate school in the future will depend more on their ability to demonstrate the businesslike management of their personal finances rather than how much their credit is built up. What you do not want is a bad credit history. A bad credit history is worse than no credit history.
The National Endowment for Financial Education (NEFE) offers five steps for building good credit:
- Pay your bills, such as rent and utilities, on time.
- Make loan/credit card payments on time.
- Pay your loan payments first. Then, spend money on other purchases.
- Apply for only the credit you need. Do not apply for all the credit you can. Each new credit card counts against your credit score.
- Never overdraw your checking/cash account.
Using a credit card is spending your future income in advance, so when it is time to pay the credit card bill, you need an income that exceeds your current spending. This is not the usual description of a college student. If you think you need a credit card, discuss it with your parents rather than the person from the credit card company that is offering you a free t-shirt. When you do get a credit card, get only one credit card, use it wisely, and pay it off every month. Better yet, avoid credit cards altogether until you get a full-time job. Many people with full-time jobs can’t pay off their credit card balances each month, so what are the odds that a full-time student will have better success keeping up with payments?
Financial patience is not a bad thing. In fact, financial patience depends on personal discipline, and discipline is a key ingredient to financial success.
Last update: Monday, September 19, 2011