When Colette was a sophomore at Oberlin College, she received her first credit card.
"I was very excited," she says. "Unlike a lot of my friends, I wasn’t being supported
by my parents. I also had a job, so I figured I was entitled to use my credit."
Colette did use her credit card – a lot. She bought spring break vacations to Jamaica, dinners for
friends, CDs and books. She was soon offered another credit card, which she also accepted. "I never
missed a payment, but I never paid anything off either," she says. "I just kept getting more
offers and moved my credit around from card to card."
By the time she graduated from college, Colette owned four credit cards and had racked up nearly
$20,000 in debt. Because her debt was so high compared to her income, her interest rates had also climbed –
from an initial 9.9 percent to 27 percent.
After college, Colette and her new husband, who was attending law school, used their credit cards to
bridge the gap between loans and expenses. "We owed nearly $50,000 in credit card debt
alone," she says. "And we panicked when we realized that we weren’t going to be able to make
our minimum payments anymore."
Getting Into Debt
A recent study conducted by Nellie Mae, the nation’s leading student finance firm, revealed that the
average undergraduate carries a credit card balance of $2,169. According to the study, many students use
their cards without anticipating how the bills will be paid off. It also showed that many students use their
cards for tuition and books, which can be more effectively paid for with a student loan.
"Acquiring a student loan takes planning," says Nina Prikazsky, vice president of
operations for Nellie Mae. "Student loans are much more flexible for interest rates and payment than
credit cards. [But] some students just never look ahead."
One cause of credit card debt is college students’ difficulty in adjusting to their newfound
financial independence. "They are used to their parents paying for everything," says Seth
Charnes, a Chicago-area CPA. "There are students walking around with $300 cell phone bills who
don’t have jobs, and they don’t understand why that is a problem."
Debt and Financial Aid
Difficulties with credit cards can lead to problems paying for school. According to Prikazsky, credit
card debt can affect interest rates for privately-funded student loans. It can also affect a student’s ability to
attend the school of their choice.
"When we do a financial analysis, there is often a certain amount of money that parents or
students are considered able to pay as part of the financial aid package," says Ronald Johnson,
director of financial aid at UCLA.
"That calculation is done based on income, not on how the applicants have chosen to spend their
money. If they are paying huge sums to credit card companies, they may not have the cash available for
their financial contribution. That could mean that the child won’t be able to attend the
university."
Should You Declare Bankruptcy?
Faced with enormous credit card debt, many students choose to declare bankruptcy. However,
according to Charnes, bankruptcy has several serious effects:
- It goes on your credit rating for up to seven years, making it difficult to obtain new credit (and credit
cards). This means you have to pay cash for everything, even airline tickets.
- You will have problems passing a credit check – for an apartment, rental car or even a job
- It’s a turn-off to potential employers. "Many employers are not interested in hiring someone
who cannot handle [their] own money," Charnes says.
Also, declaring bankruptcy does not wipe out student loans. Student loans are generally only
discharged if the date of bankruptcy is more than 10 years after studies have ceased.
Getting Out of Debt
Even if you are drowning in debt, there are some ways out:
- Contact your credit card company and try to work out a payment plan. "They are not out to get
you," Charnes says. "They would much rather lower your interest or write if off altogether than
not get any money from you at all."
- Get help from a consumer credit counseling center. They can help you work out different payment
options for your credit cards. But avoid credit groups that advertise on television. "They tend to
charge money for their services, where the consumer groups don’t," says Nellie Mae’s Prikazsky.
- Set up a budget and stick to it. Be realistic about your expenses and your financial needs, then draw up
a detailed monthly plan.
Colette and her husband have managed to reduce their credit card debt. They went to a consumer credit
counseling office, where they worked out a budget and arranged to have their interest payments lowered
over the next two years.
"Things are looking up," Colette says. "We are down to about $40,000."
Research Your Options
Before you accept credit cards in the future, you should research which companies offer the best
values. Web sites such as CardWeb offer information on fees and interest rates that
you can use to choose the best card for you.
Find your nearest consumer credit counseling center, along with useful information about credit
records and debt, through the National Foundation for Credit Counseling, a non-profit
organization made up of 1,300 financial service centers. You can reach them by phone at (800) 388-2227.
With the right tools and management, credit card debt doesn’t have to follow you forever. Check out
your options, read the fine print and know that help is available.
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