The pitfalls, benefits behind credit cards

PART ONE OF TWO
Drew sat panicking in his parents’ driveway. It was just a year ago, during his freshman year at Oregon State University, while on spring break, he was bringing home far more than a suitcase. Drew bore more than $1,000 in credit card debt.

“Listening to my voicemail scared me,” Drew said, who requested not to be identified in this article. “I didn’t want to hear any of the messages regarding the money I owed.”

According to the United States Census Bureau, 19.7 million students were enrolled in college in the fall of 2010, Drew being one of them. Like Drew, these students were swarmed by credit card marketers and banks soliciting cards. Brochures, t-shirts and even bottle openers were used to draw students in and get them to sign up.

For most of these students, the cards they acquire provided a way to pay for gas or books with no long-term negative consequences. However, for Drew, and a growing number like him, easy access to credit cards lead to uncontrollable spending and debt that could compromise one’s future. A keg of beer and a late night Jimmy John’s order now takes on a new meaning, with some freshmen racking up more than $15,000 in credit card debt before they graduate.

Now more than ever, college students in the United States need to be taught a lesson concerning the responsible and wise use of credit before they wind up needing to pay off a seemingly insurmountable debt.

Recently, credit card companies have been under great scrutiny. Critics say companies have been known to offer rates and plans that extend far beyond students’ financial means and often come with little or no financial explanation, leaving some uncertain of their obligations. Eventually, when students build up balances on their cards, they find themselves facing unforeseen fees and confusing jargon.

William Mays, a first-year student at OSU, had heard from friends about how much nicer it is to pay for gas with a credit card than out of pocket. Mays visited the Bank of America branch in Corvallis, spoke with a teller and left with a few print outs and pamphlets regarding banking for students and credit.

“When I got back to my dorm room, I sat down at my desk and began reading the book about credit cards. I didn’t find it to be very helpful,” Mays said.

Unfortunately, Mays is not the only student who found the concept of credit to be baffling. The Charles Schwab Foundation performed a survey in 2007 which showed that only 45 percent of teens knew how to use a credit card, and a mere 26 percent understood credit-card interest and fees. It’s not surprising that Mays, as well as many other college students, remain in the dark about credit, interest and debt.

In response to students’ confusion and inexperience, “Bank of America takes a conservative approach to issuing credit cards to students and our objective is to build the foundation for a long-term banking relationship,” said Betty Reiss, senior vice president of the Bank of America in the San Francisco Bay area. “To help students use credit responsibly, we provide a number of tools.”

Some of these tools include free “e-alerts” to notify customers who have reached their credit limit and an educational website developed through Bank of America’s partnership with Monster.com that provides information on budgeting, banking, smart credit and paying for college.

Though most banks do a great deal to help guide students along the right path, when it comes to credit card use and debt, many also make the point that students have to be responsible for their own actions. Some banks have argued that they have to act like responsible parents, keeping credit cards out of the hands of some students who want them. These banks also recognize that parental advice about credit use can be extremely beneficial to a young adult or student.

Raymond Brooks, a professor of finance at OSU and author of the book “Financial Management Core Concepts,” can’t exactly applaud his parents for teaching him about credit card use.

“My parents taught me probably nothing. I was the first user of credit cards, they had no prior experience,” Brooks said.    
When asked what his top three pieces of advice would be for students looking to acquire a credit card, Brooks strongly suggested that students “pay it off every period, pay it off every period, and pay it off every period!”

Brooks says that fundamentally, this is the most important lesson to be learned, especially in the event of an emergency. He asserts the idea that a credit card can act as an emergency loan card, and emphasizes the importance of paying off your monthly balance.

According to the organization College Parents of America, only 17 percent of students who hold one or more credit cards in their name regularly pay off all of the cards’ balances each month. It is no wonder so many college students are finding themselves in debt these days. The primary way to accumulate debt comes as a result of not paying off one’s monthly balance.

Obtaining one’s first credit card is much more important than some think. It’s an opportunity to build up a credit score and for those looking to buy a house or car, take out a loan, or start a business in the future, a higher credit score can result in a lower borrowing rate, as well as many other valuable offers.

While credit cards can have many effects on cardholders, the issuing banks and companies can have substantial benefits and/or consequences as well.

Gabriella Morrongiello, reporter
news@dailybarometer.com
On Twitter: @gabriellahopem