2008-10-17 / Columnists

Smith Speaks From Albany

What Should College Students Watch Out For? The Answer is One Word: Plastic
Commentary From The Desk Of Senator Malcolm Smith Minority Leader New York State Senate

October is a time when college freshmen have finally settled into their studies, high school seniors begin anticipating early admission to the college of their choice, and high school juniors start lining up campus visits as they get serious about where they want to spend four years of their life after they graduate.

And yet this autumn, as college students and their families watch the deepening crisis in the financial industry, there is an undeniable urgency to make sure that we take every possible step to avoid economic trouble.

For current or future collegians, the university is a place to learn many life lessons. But one of the harshest can come about with a little piece of plastic.

Too often, I hear from young professionals in my district who are struggling to pay off thousands (sometimes tens of thousands) of dollars in credit card debt accumulated in college.

Their stories are familiar: most applied for a credit card once they arrived on campus, promising themselves to use it just for emergencies. But, such steadfast declarations slowly gave way to purchases large and small, while interest on their card multiplied on their unpaid balance. Falling behind in their payments, they sank under a mountain of debt.

It is a painful, costly lesson that many young New Yorkers learn year after year.

Credit cards are a great way to establish a positive credit history, which can lead to bigger purchases, like automobiles and real estate. And in our increasingly paperless society, credit cards provide flexibility and convenience.

More importantly, credit cards offer freedom and independence, two qualities that appeal to those who are just starting out and are looking to establish their own identity. Credit card companies play into this desire, flooding student mailboxes with offers or setting up tables where students congregate to offer free Tshirts and mugs just for applying. Additionally, the Internet makes it easy for students to get plastic from the comfort of their own dorm room.

According to a 2005 national report, 72 percent of student respondents owned a credit card. Of those, 43 percent said they obtained their first card during their freshman year; another 23 percent had one before entering college.

And, while some students use their credit cards wisely, many first-time credit card holders - some with little or no education in personal finances - use credit to buy whatever they want, whenever they want it. What many fail to realize is that this so-called "free money" is actually a high-finance loan with a low introductory rate that balloons after a few months. And if they pay less than the minimum monthly balance - as 11 percent of survey respondents said they did - the finance charges pile up, making it difficult, if not impossible, to catch up.

Come graduation day, students will amass an average credit card debt of $2,169, according to the survey. Using that number as a balance on a card with an APR of 16.99 percent, if a typical graduate made minimum payments of $50 per month, it would take nearly six years to pay off that balance, which rockets to more than $3,200, thanks to interest.

With great power comes great responsibility. Those seeking a credit card must be proactive in learning about the rights, responsibilities and consequences that accompany it. In an economy struggling to regain its footing, this is no time to be naive.

As New Yorkers face what is sure to be one of the biggest financial crises in a generation, now more than ever people need sound information to safeguard their money. Parents can convey to their children the importance of good choices when it comes to credit cards, even before their child heads off to college. Here are a few simple tips to pass along:

Shop around for the best interest rate. Look for a fixed rate, not a low introductory rate that's temporary.

Some credit card companies charge multiple fees, including one just for being a member. Read the fine print and look for a card with low or no annual fees.

Settle on one card and pay the balance in full each month and on time.

Request a low credit limit - $500 to $1,000 - that is sufficient for emergencies yet reduces the temptation to spend for big-ticket items that are more difficult to pay off.

Parents may also want to consider adding a card, with an established credit limit, in their child's name on their account - many credit card companies offer this option. Monthly statements help parents keep track of any purchases made on that card and help children learn about responsible credit card use.

Debit cards are another viable choice. Since funds for purchases are taken directly from the bank account of the cardholder, it helps students develop fiscal accountability and budget discipline.

College is a time for students to grow as individuals and gain knowledge that will last a lifetime. By learning to use credit wisely, New York's college students will avoid a very expensive lesson.

Senator Malcolm A. Smith (D-14th District) is leader of the State Senate Democratic Conference.

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