Bob is an average college student who struggling to pay for rising tuition costs, books, gas and other bills.
Following some advice he got from friends, Bob went out and applied for a credit card.
To his surprise, Bob got approved right away and he is relieved now that all of his financial problems are going to be solved.
Now he can pay for all of his classes and books, even though he is short on cash right now, because he has a credit card and he thinks it is just as good as cash.
The best thing is now Bob can pay back the credit card company whenever he can come up with cash, plus Bob is establishing good credit. Right?
An easy solution
This is what the average college student with a new credit card thinks: that credit card companies are reasonable and they will allow the card holder to pay them back whenever they get money.
Some holders believe that credit cards are as good as cash and they use their card to pay for everything.
Then when the first bill comes, the card holder finds out they only have to pay the minimum of $15.
How awesome is this? Bob can spend about $500 a month with his credit card and all he has to pay is $15, it’s practically robbery.
It’s robbery all right, but the credit card companies are the thieves in this game, because what Bob doesn’t know is that he still has to pay the rest of the $485 plus interest, which is going to be about $100 more.
But of course Bob doesn’t realize that that, so he continues to use his credit card the same way every month for a whole year and just pays the minimum every month.
Bob never really paid attention to his balance because he figured it would not be that much and he wouldn’t have any trouble paying it all off.
So, Bob calls the credit card company to check his balance and finds out he owes over $6,000.
Bob doesn’t have that much money and his parents won’t lend it to him. Now he’s in deeper debt than before.
To avoid ending up like Bob, card users need to learn more about credit cards and how they work .
One solution is to cut up the credit cards and throw them away.
If the card user need one for emergencies, they need to lock it up in their house somewhere or give it to a responsible parent to keep.
If spending is a major isue for the card user, they might need to put the card in ice and keep it in the freezer.
Next thing that should be done is to call the creditors and explain the situation and tell them that the bill will be paid.
It may sound corny, but it works and it will keep the creditors from calling the house everyday.
“The bottom line is that communication is key; if you keep communication with them, the creditors will trust you to pay them back and they won’t harass you,” Michael Bundy, 46, film student, said.
Usually people go into hiding when they are in debt but that can only hurt them because that bill will only get larger and they will lose credibility.
“When people are in debt, they go into fear mode and lose communication with the creditors and they get themselves into deeper debt,” Bundy said.
Finding a way out
To get out of debt, start paying the bills any way possible, and if needed, get assistance from a debt consolidation, but watch out: Some of them can hurt more then help .
Websites such as youngmoney.com and fool.com give advice on how to avoid debt as well as tips on understanding your credit.
It may take a while to pay cards off, so be patient and make sure you watch your spending because you don’t want to get into deeper debt.
To avoid getting into debt, there are easy tips to help.
Keep the number of credit cards down to two, preferably one, if possible .
“Creditors will pre-approve almost anyone and believe me, you can find yourself with more cards then you will ever need,” Bundy said.
Make sure that the card has a low interest rate, or get a card that requires paying off the entire balance at the end of the month.
“Anyone can pay $15 a month; just make sure though that you do pay off the entire bill pretty quickly,” Bundy said.
To be safe though, it is best to pay off the credit card bill in full every month.
Do not pay bills late, because it will show up in the credit history and having bad credit will affect the card holder for a long time.
Credit report can be checked for free online, on sites such as freecreditreport.com. The higher the score the better off card holders will be in future purchases such as cars and house.
Building good credit
Credit is so important that now even employers are beginning to run credit checks before considering someone for a position.
However, an employer needs permission from the applicant to run a credit check.
The Fair Credit Reporting Act (FRCA) requires written permission any time an employer runs a background check
The three major credit bureaus in the U.S. are Equifax, Experian, and Trans Union. Credit reports can be obtained from them as well.
They may not have the same report since not all companies report to all three bureaus.
FICO, or The Fair Isaac Company, condenses all of the credit information into one three-digit score.
A score over 750 is excellent and 720 or more is pretty good.
A score of 660 to 770 is acceptable and 620 and below is a risky score to lenders.
“It takes a long time to get a good credit report, but if you paid your bill, have the creditors write a letter that you paid in full so you can show you have good credit,” Bundy said.
Avoid spending more than the credit limit; most companies will charge a fee if that occurs and may even raise the Annual Percentage Rate or APR.
The APR is an interest rate that is charged the longer it takes to pay back the credit card company.
People should not use the credit card to buy something they can not afford.
“I don’t understand people who use their credit card to buy something they can not afford because that is a sure way to fall into debt,” Bundy said.
Hidden fees are a major reason why people can go into debt and most students are not aware that they exist.
There are many ways hidden fees can appear on the the bill, so people using credit cards should be aware on how they can show up.
One way a hidden fee appears is by paying the bill late, which might add an extra $30 to the bill.
If that late fee is not paid, another hidden fee for not paying for the first hidden fee will show up to increase the debt.
Many people are unaware of this and fall into debt without ever realizing it.
Spending over the credit limit or not meeting the minimum purchase will incur extra fees.
Using a store credit card at a different store or using the card to withdraw cash can also bring in the dreaded hidden fees.
Students targetted
Many credit card companies set up tables on college campuses offering free trinkets to sign up for their special student card.
They promise low rates and high limits for new applicants.
Students who get their credit cards at on-campus tables carry larger balances and pay off their cards later than those who do not, according to the results of a nationwide survey of college students released by the U.S. Public Interest Research Group (PIRG).
An average undergraduate student has four credit cards and $2,200 in credit card debt.
The amount increases to $5,800 if for a graduate student, according to Nellie Mae, the nation’s largest maker of student loans.
The best way to prevent debt or to get out of it is to create a budget and to stick to it.
Go through all the bills and begin to cut out items that really aren’t neccesary. Figure out how much money is being spend on recreational activities.
Set limits on how much spending is on food, gas, bills and other activities.
Stick to these limits no matter what, unless there is an emergency, a real emergency not something like a sale.
Be smart. Always shop around for credit cards with lower rates. Move balances from high interest accounts to low interest accounts.
Don’t avoid credit cards completely, credit is needed for loans as well as purchases. Just be careful and responsible while spending.
Credit cards create a catch-22 situation where a credit record is needed to get a credit card even if there has never been a credit record.
Solve this problem by applying for one credit card during college.
They are easier to obtain in college and allow new applicants to build up credit for the future.
If credit isn’t built up by the time a loan is needed or to buy a car, students may end up having to co-sign a credit card with parents .
If they co-sign, they will not be happy if their credit is ruined by irresponsible spending.
By co-signing, they are legally responsible for that account.
Negative actions such as collection accounts, bankruptcies and charge-offs will stay recorded on the credit report for 7 to 10 years.
If those bills are paid then the report will mark it as “paid” and it will improve the credit score.
When a credit report is checked by lenders and creditors, it is considered a “hard inquiry.” If there are multiple inquiries it can bring the credit score down.
Soft inquiries, such as when an applicant checks credit scores, do esn’t affect the score at all. Be sure to check your score often.
Although many college students fall into debt and it seems intimidating, with careful budgeting, students can create a relationship with their credit that will benefit them for the rest of their lives.
Avoid Debt
Try to give 10 percent more than the minimum payment required.
Consumer Credit Counseling offers free counseling to college students.
Many credit card companies offer a 25-day grace period in which to pay for new purchases without being charged finance charges, but the balance needs to be paid in full each month.
If a credit card starts out with a low introductory rate, when the low rate period ends, the existing balance will likely be subject to the regular, substantially higher interest rate.
Avoid cards that allow a minimum payment of 2-3 percent per month. The credit card company makes much more money in finance charges the longer repayment is extended.
If the credit card is issued by the bank, an agreement may have been signed which permits the bank to take funds from that account if bills are not paid.
Think before making purchases. If it is unaffordable now, it will probably be unaffordable in a month when the credit card bill comes in!
– Tips from www.youngmoney.com
