Some timely advice for university and college studentsTuesday, August 27, 2013 by: SooToday.com Staff
CREDIT COUNSELLING SERVICE OF SAULT STE. MARIE AND DISTRICT
How new post-secondary students can avoid the credit crunch
As the summer begins to draw to a close, many local students are beginning a new adventure in post-secondary schools across the city and around the country.
For these students, they will not only be broadening their horizons, learning new skills, and gaining valuable work and academic experience but, unfortunately, studies show that the majority of these students will also be saddled with ever increasing levels of government loans and consumer debt.
Studies show that roughly 90 percent of post-secondary students have at least one credit card and the number of cards in possession increases as they progress through their post-secondary education.
Students who habitually hold a balance on their credit cards often graduate with roughly $3,450 in credit card debt.
“With a credit card debt of $3,450 at 19.99 percent and only being able to afford the minimum payments, due to managing your student loans, it will take just under 19 years to fully pay off,” says Matthew Keenan, a credit and education counsellor at the Credit Counselling Service of Sault Ste. Marie and District.
It’s no wonder that, according to a recent BMO study, finances are the number one stressor for post-secondary students. Academics and future job prospects come in second and third.
“Credit cards can get a lot of students into trouble because many new students just don’t understand how they work. They often see cards as an income and not a debt,” says Keenan. "Most students are learning to actually manage their money for the first time in post-secondary and often make mistakes. Unfortunately, financial mistakes can be hard to bounce back from and credit cards make it too easy to keep spending once the money runs out.”
The Credit Counselling Service of Sault Ste. Marie and District offers these things to consider when getting your first credit card.
Understand the cost of credit:
“Many new card holders simply don’t know how interest really works when it comes to paying that card off,” says Keenan.
Credit cards are short term loans, if you pay off the total balance by the end of the loan you will not face interest charges however, if you do hold a balance that interest is applied to the total amount charged.
“There is a common misconception among new credit users that interest is only applied to the remaining unpaid portion of what was charged. What really happens is that the interest is applied to the total amount charged, plus any remaining balance brought forward from previous months. Using our example of $3,450 charged to a card with an interest rate of 19.99 percent and just paying the minimum payment, which is about 3 percent of the total balance, it will not just take about 19 years to pay off but the interest payments alone will cost $4,048 more than doubling the original balance,” states Keenan.
“Interest payments really increase the cost of an item over the length of your loan. A dinner bought or a movie out will cost twice what you originally paid under our example.”
Be aware that add on features also increase the cost to maintain your credit cards.
Add on features, such as balance protection and insurance, are paid on a monthly basis and can cost as much as $14 a month.
“Students are often sold add on features to their cards without really understanding them or they have the intention of cancelling the product and simply forget about it,” says Keenan, “but forgetting $14.00 a month really adds up over the course of a year, taking money away from other areas such as food or bill payments.”
Keenan points out that: “Add-on features play into your minimum payments each month. From your payment these add-on features are paid after interest is covered leaving whatever is left over to be applied to principle. These add-on features really stretch out the time and cost of maintaining a balance on your card.”
Avoid cash advances
For some, the thought of using their credit card as a source of hard cash is appealing.
A cash advance means that you are borrowing cash from your credit card.
These advances always have higher interest rates; on student cards they average 21.99 percent.
On top of the interest you pay for a cash advance you are also charged a usage fee in the range of $3-$5.
“For some students who use a cash advance, they see the fee for withdrawing money and figure it is better to withdraw more to offset that fee. Unfortunately, by withdrawing more cash the student is hit with higher interest costs,” states Keenan.
There are other transactions that are viewed as cash advances and are charged as such.
One student card views bill payments that have not previously been arranged with a company as a cash advance,.
“If you get to the end of the month and have not budgeted well for your phone bill and choose to cover it with your credit card, it would be considered a cash advance. If you arranged with your phone provider to have automatic bill payments come off your card that would not be considered an advance and would not be subject to the extra fees and interest rates. Unfortunately, many students don’t know this and figure that it is ok to pay their bills using a credit card after the fact. “
Understand your agreement
Keenan points out that, “many people who use credit cards, adults included, have no idea what their agreement says when they sign up for a new credit card.”
Many students will be offered credit cards with low introductory interest rates, or the card fees are waived for the first year while on campus.
It is important to know when these special offers run out because, the cost to maintain the card quickly escalates and if you are holding a balance month to month the interest can quickly eat away at the money you have set aside for living expenses.
Looking at the terms of your credit cards will also highlight the penalties for missed payments.
Looking at the terms and conditions for one student credit card at a major bank, it states that if you miss your minimum payment any introductory rates will be forfeited and regular rates will apply.
Further, if you miss two minimum payments within a 12-month period your interest rate will increase by 5 percent.
This would make your rate 24.99 percent on all purchases and stay in effect until you have managed 6 months of consecutive minimum payments.
Simple ways to avoid the credit crunch
“I’m sometimes asked by students what is the best way to keep their credit in good standing. My answer is always the same three steps pay in full, on time, every time,” says Keenan. “By paying in full you avoid interest charges, meaning that what you intended to spend is all that you will end up paying. By paying on time and every time you will again avoid interest charges, but you will also be building a strong credit history which will work in your favour after graduation.”
“The minimum payment is really the minimum. You should at least be covering that,” Keenan adds, “if you can’t cover the minimum, you are not only increasing your debt load, but you are negatively impacting your credit score, which can have serious implications after you graduate in terms of being denied further loans, auto financing, mortgages, and in some industries could cost you a job.”
“Just paying the minimum extends the length of time you remain in debt, the total cost of the debt, and really can set you back financially. If you commit to paying more than the minimum you can really cut down your debts and the total cost of the loan.”
By applying a self-imposed minimum payment of $100 to the example amount of $3,450 the debt will be paid off in four years instead of 19 and save you roughly $2,300 in interest payments.
Keenan points out that: “Many new grads end up getting a job, begin earning a good income and they start to feel that they can easily manage their minimum payments to their debts, causing them to be in debt a lot longer than is necessary. What should happen is that they should be really aggressive in paying down debts early before the interest starts to get out of hand, which in turn just eats up more of their money.”
Being aware of your credit limit and staying well below it will help you maintain a strong credit rating.
“If you have a maxed out credit card, your credit score will take a pretty significant hi,t” says Keenan."This is because credit rating companies look at your credit utilization level. If you have a $500 limit and your balance is $450 you are at 90 percent utilization. Companies will look at this and see that you have the potential to be way over your head in debt, making you a risk in their eyes. Your utilization is also calculated by using your end of the month balance, so even if you pay off your entire bill right away there will still be a hit on your credit.”
Keeping your utilization below 35 percent is ideal for a number of reasons as Keenan points out,.
“By keeping your utilization levels low you are more likely to be able to pay off your balance at the end of the month. Your credit score will remain strong by making sure your end of month utilization is low, and if you must have a balance and accrue interest it will be less than if you have a higher balance allowing you to pay it off sooner.”
Credit cards themselves are not a problem; it is how students use their new credit cards that can land them in trouble.
Effective management of credit will allow students to build positive lifelong practices for dealing with loans and debt.
Keenan advises students to, "Be smart when using your card, and leave your card at home if you are going out with friends. If you don’t have the card with you, the temptation to use it on dinner or new clothes or whatever simply won’t be there, helping to keep you out of debt.”
With many students holding a credit card balance upon graduation, they are beginning their professional lives in consumer debt.
“If you can graduate with as little debt as possible, you are putting yourself ahead financially of your peers who are funding their nights out, coffee, and newest technology purchases on plastic. Instead of paying off two loans, credit and OSAP, you can focus on OSAP and pay it off faster and more aggressively upon graduation,” says Keenan.
The Credit Counselling Service of Sault Ste. Marie and District is a not-for profit accredited credit counselling agency whose mandate is to educate and counsel the community on issues surrounding money and credit management.
For more information about credit counselling services in Sault Ste. Marie, please contact Credit Counselling Services of Sault Ste. Marie & District, 298 Queen Street East, Sault Ste. Marie, ON, P6A 1Y7, visit our website, follow us on Twitter or LIKE us on Facebook.