College Students Should Beware Of Risks Of Using Credit Cards

(CBS) —The average undergraduate leaves school with a debt of $18,900, a 66 percent increase from five years ago, according to a study by Nellie Mae, a leading national provider of higher education loans under the Federal Family Education Loan Program. This study suggests that this is in part because of student loans, which more and more students report needing due to rising tuition costs.

However, according to Financial Advisor Ray Martin, a frequent guest on CBS news shows, this is also due to four years of unnecessary charges — from late-night pizza deliveries to high-end sneakers and alcohol.

College students are prime targets for credit card companies, which set up tables on campus and entice passersby to sign up for new cards with promises of free T-shirts and other goodies.

Unfortunately, many students eagerly apply and use them unwisely.

“A college freshman is offered eight cards in his or her first semester,” noted Mr Martin. “The average graduating senior has six cards in his or her name.”

Students double their credit card debt and triple the number of cards in their wallet between the time they arrive on campus and graduation, Nellie Mae found. By the time college students reach their senior year, in fact, 31 percent carry a balance of $3,000 to $7,000 dollars.

“Making the leap from college to the real world is going to be a whole lot tougher without credit history,” points out the Motley Fool website, a financial education site. “Without a credit card, you can’t rent a car or get a good car insurance policy. You could get turned down for an apartment when a potential landlord checks your credit history and finds nothing.”

Mr Martin suggested applying for — and keeping — just one credit card. Parents who are concerned about their college student falling into debt can consider giving their child a prepaid card. This safety net allows parents to set a dollar amount on the card so nobody has to worry about the student driving up a large balance.

Parents are also advised to refrain from co-signing on an account. “You don’t want your student’s financial mistakes appearing on your credit report,” said Mr Martin. Studies indicate that 27 percent of students use a credit card to help finance their college education. The Nellie Mae study found that students who charged tuition and other related expenses left school with a credit card balance of $3,400. This is much higher than the average graduate’s balance of $1,600.

How does all of this debt ultimately impact students? Nellie Mae found that more than half of graduates with debt feel burdened by that debt. And, for the first time, the study discovered “the probability of owning a home decreases by a small amount as debt levels increase. Family structure, age, and income remain the most important determinants of homeownership, but an additional $5,000 of debt reduces the probability of owning a home by about one percent.”

For more information relating to credit card debt, or to access the recent Nellie Mae study, visit Nellie Mae at www.nelliemae.com or Motley Fool at www.fool.com.