A Guide to Borrowing and Using Credit

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Are You Ready for the Challenge?

Going to college can be an exciting time, full of opportunity and freedom, especially if you are planning to live away from home for the first time. Aside from managing your academic life, part of the challenge of being on your own is learning to manage your expenses: to live within your means, however limited they may be; and to borrow and use credit wisely. This publication covers the following important points that can help you meet the challenge of borrowing and using credit responsibly:

  • Loans and other forms of credit must be repaid, usually with interest and other charges.
  • You may be able to choose some of the terms of your repayment; and your choices will impact the total amount you will repay.
  • Budgeting can help you make wise decisions and achieve your goals.
  • Credit cards are convenient, but they must be used cautiously.

Are you Ready for a Credit Card?

As a student, you will have to decide for yourself whether you can handle the responsibility of a credit card. They are easy to get but not so easy to manage, especially if you end up with a high, unpaid balance on which interest is accruing, but payments are not being made.

When making your decision about a credit card, ask yourself:

  • Do I need a credit card?
  • Can I afford a credit card?
  • Will I be able to pay off my balance each month?

If you decide to apply for a credit card, be a smart consumer and shop around. Visit resources like www.cardweb.com for guidance on evaluating credit card offers. Look for a company that offers the following:

  • A low fixed interest rate, finance charges or low Annual Percentage Rate (APR)
  • No annual fees
  • A grace period (time during which no payments are due) before finance charges are posted
  • Other benefits including purchase warranties, free gas, airline miles, etc.

How Credit Cards are Billed

Unlike repayment on a traditional loan, such as a student or car loan, credit cards do not allow you to spread the amount you owe over a fixed period of time. Instead, you are required to make a minimum monthly payment, which is the smallest amount you can pay and still meet your cardholder agreement (the terms you agree to meet when signing up for the card). The minimum payment is usually between 2 or 3 percent of your outstanding balance. As your credit balance increases or decreases, so does the minimum amount you are required to pay monthly.

Sample Credit Card Repayment

Principal
Loan Amount
Borrowed
Interest Rate
Monthly
Payment

Number
of Monthly
Payments
Total
Amount
Repaid
$5,000
"19%"
35 of balance
(Initially, $150)
238 (20 years)
$10,360

Don’t Take Cash Advances.

Use your bank debit card (see next section) if you need cash, not your credit card. The interest rate on your credit card is usually 2 to 3 percent higher for cash advances than for purchases. Cash advances don't get paid in full possibly until the balance of the credit card is paid off.

Debit Cards

Another type of “plastic” that resembles a credit card is a debit card. Banks generally issue debit cards, also known as ATM (Automatic Teller Machine) cards, when you open up a checking or savings account. (Many colleges also have a type of debit card that allows students to make campus purchases from a central student account.) A debit/ATM card gives you 24-hour electronic access to your bank account for making deposits, withdrawing cash and making purchases. When used for a withdrawal or purchase, funds are taken out of your account immediately.

Like credit cards, debit/ATM cards are very convenient and, increasingly, students use them for purchases in place of writing checks. An important point to remember about using debit cards, however, is that you must have enough money in your account to cover your withdrawal or purchase. Also, you need to track your ATM transactions carefully, just like keeping track of the checks you write, in your account ledger or bank book.

Using a debit card can be a good alternative to using a credit card because you access your own money instead of borrowing from the credit card issuer. However, debit cards still require disciplined use and careful tracking. Sometimes you can overdraw your account. Be careful of overdraft fees.

Where to Go for Help with Borrowing and Credit Problems

Hopefully, you won’t reach the point where you need help, but if you do, there are places you can and should go for assistance. The worst thing you can do is to ignore your financial problems.

On campus, the financial aid office can be a big help by providing basic advice on student loan alternatives; guidance on how best to cover unexpected expenses while in school; referrals for locating part-time work; sample student budgets; and counseling services if you need help managing your finances. They are there for you!

You can also contact one of the many local or national credit counseling services, which provide low- or no-fee services to assist with credit repair:

Nellie Mae, A Student's Guide to Borrowing and Using Credit (PDF)

Good Debt vs. Bad Debt

Good debt helps finance long-term investments, like education or homeownership, which increase in value over time. For example, individuals with a college education earn an average of $1 million more over their lifetimes than those with just a high school diploma.

Bad debt helps finance short-term gratification, like a vacation or a new outfit, that is gone, outdated or forgotten long before you have paid it off.

Reducing Expenses While in College

  • Don’t buy a car unless you are commuting and can’t use public transit.
  • If you must buy a car, this is not the time for the flashy sports model!
  • Buy all the used textbooks you can, preferably from other students; and return your books at the end of the semester for partial reimbursement.
  • Comparison shop for big ticket items such as computers or stereo equipment.
  • Eat in the cafeteria using your meal ticket or cook at home.
  • Choose your purchases carefully; don’t buy spontaneously.
  • Work out in the school’s gym—your fees may already be paying for it!
  • Check out on-campus services like dental schools for teeth cleaning, etc.
  • Buy items on sale!
  • Limit telephone bills by using e-mail or postal service to correspond with friends and family.
  • Share expenses with other students such as commuting, rides home, telephone service, etc.
  • When shopping, leave your credit cards at home.

A Note About APRs

Annual Percentage Rate, or APR, represents the rate of interest charged on credit card purchases, plus fees, expressed as a yearly rate. Federal law (under the Truth-in- Lending Act) requires credit card issuers to disclose their APR as a way for consumers to compare the terms of different credit cards by using this common index.

Warning Signs: When You’re Headed for Trouble

If you already have a credit card, be aware of the following signs that you may be overspending and headed for trouble:

  • You pay your bill late.
  • You only pay the minimum due.
  • You often exceed the credit limit.
  • You use one credit card to pay off another.
  • You use a student loan to pay off a credit card.
  • You must work overtime to keep up with your bills.