Student Credit Card Use Could Cause Problems Later

If you're using plastic for educational and living expenses, it's time to think about credit card debt.

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Students increasingly have been using credit cards to finance living expenses and education, a necessity for many given the rising cost of education.

Despite the name, credit cards are in fact loans, requiring repayment with interest. Paying high interest on educational expenses means overpaying for college costs and the need for using credit cards must be balanced with the danger inherent therein.

[See the best credit cards for new college grads.]

Students appear to be experienced in using credit. In 2009, Sallie Mae reported that 92 percent of undergraduates charged direct costs for education like tuition and textbooks. Students appear also to be experienced in building debt. The same report shows close to 20 percent of seniors carrying credit card balances greater than $7,000. Added to $24,000 in educational loans, graduates on average owe close to $30,000 in debt.

Therein lies the danger: spiraling debt. Student credit cards often have interest rates that start around 20 percent and multiply with late or missed payments. And those payments are generally due every month, with no deferment, forbearance, or forgiveness. The result is that students can easily slip into debt, destroying their credit ratings and the ability to use credit to secure basic needs like an apartment or a car.

The Credit CARD Act of 2009 restricted companies' marketing on campus and required applicants under 21 years old to procure a co-signer or prove the ability to make payments. However, it may not be as simple as restricting access. Today's economy has many contradictions, and to buy on credit you must have established credit, which cannot be done without access to credit. Building credit during college may help procure future loans. It's much easier to rent that first apartment and secure that first car loan with good credit.

[Learn more about the Credit CARD Act of 2009.]

Bad credit, however, can obstruct your ability to do anything requiring a background check, including securing employment or a professional license.

What should students do? Only use a credit card if you can pay the bill in full monthly. Carrying a balance means you pay interest on interest!

[Get more money tips for college students.]

Consider on a card with 24 percent interest:

The $800 textbook bill:

First month: $800 principal + $16 interest = $816 due - $100 payment = $716 forward

Second month: $716 balance + $14.32 interest = $730.32 due - $100 payment = $630.32 forward

Third month: $630.32 balance +$12.61 interest = $642.93 due - $100 payment = $542.93 forward

Payments are due every month, even during school. With no additional purchases, it will take nine months to pay for your books and you will overpay! Consider, too, that $100 can be hard to pay monthly while in college.

Here are some additional things to think about:

• Evaluate your options: Many student cards have high interest but your bank or smaller lenders may offer a lower rate. Also consider cards with lower limits so you don't overspend.

Consider credit cards in conjunction with educational loans: In its 2010 "How America Pays for College" study, Sallie Mae reports an alarming 35 percent of those who used credit cards for direct educational expenses did so because they didn't think they were eligible for financial aid. More than two-thirds did so out of convenience. It's worth investigating whether you qualify for financial aid! Educational loans, especially federal loans, often have lower interest rates and typically defer payments during school. The current rate on an unsubsidized federal Stafford loan is 6.8 percent, compared to 20 percent on a student credit card. It may be wise to use student loans for textbook and tuition bills and credit cards for smaller bills and the occasional night out.

[Learn more about financial aid and paying for college.]

Read the fine print: This applies to both students and co-signers. Promotional rates expire and co-signers may be responsible as long as the line of credit is open, long after losing the ability to influence the practices of that promising student.

Ultimately, the use of credit cards can be beneficial as long as you build credit—not debt—and don't pay more for school than you already must!

Radhika Singh Miller is a program manager for Educational Debt Relief and Outreach at Equal Justice Works. In 2008, she served on the Student Loans Team in the Negotiated Rulemaking for the College Cost Reduction and Access Act (CCRAA) and has extensive knowledge of this landmark educational debt relief legislation. Miller graduated from Loyola Law School Los Angeles and was most recently a staff attorney at the Partnership for Civil Justice, focusing on constitutional and civil rights litigation and advocacy.