Visit any college campus during a football game or during the first week of school and you will see vendors offering free t-shirts and hats in exchange for a signed credit card application. “But I don’t have a job,” you may hear a student explain to the vendor.
“That’s okay, all we need is a signed application and we’ll look at what we can do for you.”
The student complies, assuming the process is without harm, and goes about her day with a new t-shirt that she will most likely wear only once.
A couple weeks later, a shiny new credit card arrives in the mail. Not wanting to throw it away, she holds on to it, “in case of an emergency.” Being a college student living on loans, excess spending money is limited and there are some clothes she “needs” for a get together this weekend. She pulls out the credit card, swearing that she will pay it off in full when the bill arrives. She will just have to skimp on groceries for the month.
Time flies by and the bill comes sooner than expected. She has 25 days to come up with the money, not only for the clothes she initially purchased, but also for the groceries she could not afford. She writes a check for the minimum amount owed, vowing to pay the remaining balance over time, which is accumulating daily thanks to a 22% rate of interest.
Do credit card companies care if you fail to pay the balance every month? Absolutely not: they profit from it. That is exactly why they target the post-high school demographic so aggressively. It is common to see a 20% interest rate for a student credit card. Capital One’s student card has a 19.8% variable APR (annual percentage rate). This means that it changes with the prime rate.
According to the American Bankruptcy Institute, almost 20% of individuals filing for bankruptcy are college students. That is a sad statistic, adding unnecessary financial burden to an already cash-strapped individual. It is possible that because bankruptcy is becoming more common, people fail to realize how it can affect their ability to live the life they expected. A college student who declares bankruptcy will have a difficult time finding housing, getting a car loan, or even choosing a reasonable cell phone provider.
Yes, credit cards are convenient and can be helpful when building credit, but only when used responsibly. The same tool that can help build credit can cause irreversible damage. Many online retailers are making it easier to shop without a credit card by deducting funds directly from a checking account or by using tools such as Paypal.
Plastic spends more easily than cash. When we carry cash in our pockets, we tend to spend less than when we use a credit card. Both students and parents should consider the consequences of using a student credit card before signing for that free t-shirt.
George Gallagher has written for over 30 personal finance and education blogs. His expertise is in the field of student loans where he guides students through the process of comparing student loan consolidation to make sure they are getting the most out of their situation.