Sallie Mae just came out with a report that summarizes trends in credit card use among college students. The results are pretty eye opening. I would like to discuss them for a moment before issuing my recommendations for credit card use in college.

The Results

A summary can be found here, but briefly:

• Nearly one-third (30 percent) put tuition on their credit card, an increase from 24 percent in 2004, when the study was last conducted.
• In total, 92 percent of undergraduate credit cardholders charged textbooks, school supplies, or other direct education expenses, up from 85 percent in the previous study. Students who used credit cards to pay for direct education expenses estimated charging $2,200, more than double 2004’s average of $942.
• Eighty-four percent of undergraduates had at least one credit card, up from 76 percent in 2004. On average, students have 4.6 credit cards, and half of college students had four or more cards. The average (mean) balance grew to $3,173, higher than any of the previous studies. Median debt grew from 2004’s $946 to $1,645.
• Only 17 percent said they regularly paid off all cards each month, and another 1 percent had parents, a spouse, or other family members paying the bill. The remaining 82 percent carried balances and thus incurred finance charges each month.
• Eighty-four percent of undergraduates indicated they needed more education on financial management topics. In fact, 64 percent would have liked to receive information in high school and 40 percent as college freshmen.

My Analysis

Almost all of this report surprised me to some extent. I am amazed that people would put tuition on a credit card for any other reason than to utilize a reward card, while paying their balance in full. I would like to believe that was also the intent of purchasing school supplies on a credit card as well. Unfortunately, with only 17 percent of students saying that their credit card is being paid every month, the idea that college students are responsible reward card aficionados is simply impossible.

Students had on average 4.6 credit cards, which strikes me as quite a large number for a population with little or no income.

What might be even more amazing is that only 1 percent had parents paying the credit card balance.

My Recommendations

Clearly, parents need to have a greater role in teaching their college age children how to handle credit cards responsibly. Here are some basic guidelines that I would recommend.

1. Try Hard Not To Finance College With Credit Cards – Bravo if you are paying your tuition with a credit card in order to score reward points, but only if you are paying it off in full at the end of the month. If you are actually financing your education through credit card debt, you are making a grave mistake. Credit card debt is the worst form of debt there is. It has terrible interest rates, payment terms, and the interest is not tax deductable. Furthermore, the credit card companies are free to change the terms at any time, for any reason. In reality, it is only slightly more prudent than taking a loan from the mob.

Spend the time to work with your school’s financial aid office and get education loans from the government and private banks.

2. Teach Your Children How To Use A Credit Card Before They Attend College

Credit cards are useful tools to make payments while avoiding carrying cash. Show this to your children by getting them a card on your account at an early age. Tell them that they are only able to use it with your permission, or in an emergency. Require them to pay you back for all charges out of their savings. Get them in the habit of only using the credit card to make purchases that they currently have the savings to pay for. Ultimately, you will want them to have their own card, and show them the importance of paying their bills on time. Follow up with them frequently to ensure that they are paying on time. Go over the bill with them and point out the interest rates and payment terms.

3. Keep The Number Of Cards To A Minimum

There is no reason to go crazy with credit cards at a young age. It will be much harder to teach them to monitor their spending habits when they are constantly receiving bills from various cards. With a single card, they will eventually learn when they will get their bill, and when it will be due. Only once they have been paying their card reliably for some time, should you begin to look into a second, backup card.

Conclusions

It is clear that our college students are starting off with poor spending habits at an early age. Sadly, these habits are likely to stick with them once they graduate, leading to a life of debt and struggle. It is never too early to start your children on a path to financial responsibility.