Written by Garry Marr, Financial Post
Next month parents will send their children to university and colleges across the country without having told them about the facts of life.
On campuses throughout the country there lurks a danger that can potentially scar students for years. It could also prove to be something students learn to cherish.
I’m talking about credit, of course.
Most of those young faces with the virgin balance sheets will be experiencing debt for the first time in their lives.
It’s not just student debt, of which there is now $15-billion owed to the federal government. Many students will be offered their first credit cards, and unlike loans from the government, which hover slightly above the prime rate, credit card debt has a more crippling interest rate in the 20% range.
Roxanne Dubois, chairpreson for the Canadian Federation of Students, says back-to-school means a barrage of costs for her members.
“Students are already very indebted in this country. Students have many financial decisions to make, whether at the beginning of the year or all throughout the year,” says Ms. Dubois, noting educating students on money management differs on a campus to campus basis. “Credit cards might not be what the student needs to address his financial activities throughout the year. If I were to give people a word of advice, it’s to explore your options.”
There are some valid reasons for a student to have a credit card. As it does for anyone else, it represents cash you might need in an emergency — though some of us have a different definition of emergency.
There is also something to be said for establishing credit at such an early age. University students paying off debt every month could establish four years of solid credit, which will only help their ratings for when they want more serious credit for something like a house.
But you only need one card to help your credit rating; applying for more than one might actually hurt your rating.
The credit card companies tend to offer a very short leash to students but it’s just long enough to get some into trouble.
Cathy Velazquez, senior vice-president of communications with MBNA Canada Bank, said her company takes a fair and responsible approach to lending.
“If we approve a credit card application made by a university student of age who has the ability to pay, we have different terms to help them better manage their financial obligations,” she wrote in an email. “Our objective is to create the foundation for a long-term relationship and help students establish a healthy credit rating that enables them to achieve longer-term financial goals.”
She noted not every applicant will qualify for credit and when the cards are approved, it is usually with an initial limit of $500 to $1,000.
Students are also given a brochure called “Credit 101,” which contains consumer tips for handling credit and managing debt. I wonder how many students read that brochure.
In the United States, they got a little tougher with the credit card companies and the luring of students under the Card Act of 2009, says Bill Hardekopf, chief executive of Birmingham, Ala.-based LowCards.com.
“An issuer can’t set up a table on university and have free giveaways with a credit card,” said Mr. Hardekopf, noting hungry kids would sign up for cards to get a slice of pizza.
Even tougher, if you are under 21, you need to have proof of income or an older adult must co-sign before a credit card is issued.
“What had happened is issuers were running rampant on college campuses issuing credit cards. The average kid was graduating with 4.6 credit cards and $3,000 worth of credit card debt,” said Mr. Hardekopf.
Scott Hannah, the Vancouver-based chief executive of the Credit Counselling Society, says about 25% of his young adult clients have some type of credit card problem that can be traced to their post-secondary school years.
“What we see here is young adults one or two years into their education and they have four or five credit cards and they are all at the limit. They are not being used for smart choices or emergencies,” says Mr. Hannah.
He continues to push for more education in the school system, something his group has started in the Vancouver area. But he also says parents have to play a key role in educating their children.
“They just haven’t learned that a credit card isn’t cash. It’s similar to new immigrants to Canada who haven’t been exposed to credit in their previous mortgage,” says Mr. Hannah. “You are mortgaging your future paycheques and they need to learn that.”
For students that lesson needs to start before school begins next month.
- Balance Transfer Credit Card Market Heats Up (Again!) (moneyexpert.com)
- Back to our old tricks? Credit card issuance hits 3-year high (money.cnn.com)
- Credit cards and your business – what you need to know (simplybusiness.co.uk)
- Buy Like Buffett: How to Get the Most Out of Your Credit Cards (savings.com)