What role does personal finance play for college students? In part three of the Money Mistakes We Make Growing Up series we look at the personal finance mistakes college students make, and how to avoid them.
It’s no secret many college students lead free-wheeling, sometimes reckless, lives. The dangers of this lifestyle are real; we are too frequently reminded by stories of alcohol-related behaviors shattering lives—or ending them. Despite the risks, a pounding head is the only consequence most students feel from another late night.
But another epidemic is targeting college students and threatens consequences not for a night or a year, but for five, ten, even twenty years. That epidemic is credit card debt.
If somebody asked me: What should I know about personal finance while I’m a college student? I would simply say: avoid going into credit card debt, and the rest will take care of itself. That’s why credit card debt is the one and only college money mistake this series features*.
Money Mistake: Carrying a credit card balance.
Credit card banks are eager to load up ignorant freshman pockets with plastic. Just head to any university in September and take note of the credit card offers plastering bulletin boards, student workers giving away swag in exchange for a credit application, even student phones ringing off the hook with telemarketers’ credit offers.
The result? Tens of thousands of students with little or no income but plenty of uses for money suddenly have thousands of dollars of credit. Most have never had to be financially responsible in their life. It’s free money, Baby.
While carrying a credit card balance is never an ideal situation, there are times in life, I think, when it is acceptable, such as investing in clothes or housing for a job or making ends meet during an emergency if you don’t have an emergency fund. But using credit cards to live beyond your means is never okay. In fact, it is catastrophic.
So why is Joe College in so much trouble? The same reason the credit card banks know he’s profitable. If he maxes out a card for a trip to Cancun freshman year, chances are he’s not going to make enough income (being a full-time student) to pay it off anytime soon, so he’ll be making minimum payments, barely touching the principal of his debt but lining the bank’s pockets with finance charges. Even when he graduates, Joe’s entry-level salary will be barely enough to eat on, let alone pay down his debt, and the bank will keep on collecting.
It’s hard not to spend money in college. There are a million things to do, plenty of time to do them, and often a vast separation of wealth between peers. In the real world, neighborhoods – sometimes even public schools – are more or less segregated by economic status. In college, however, some freshmen arrive on a scholarship and a 30 hour-a-week job to pay for food and books, others roll onto campus in their high school graduation present unloading flat-screen TVs and leather loveseats. The next day they’ll sleep across the room from each other and share classes and meals. For students of lesser means, avoiding the temptation to want what others students have is very, very hard.
Yes, college is a time to have fun, but it’s also a time to set yourself up for success. For some, this mentality comes naturally, others will need to work at it. The willpower to stick to your budget in college isn’t unlike the motivation it takes to hit the library on a sunny Saturday. The sooner you learn to make sacrifices now for benefits later, the richer you’ll become.
This article is from the Money Mistakes We Make Growing Up series.
*Numerous other topics including budgeting, saving, taxes, income sources all present unique challenges for students. I don’t mean to overlook them here, but within the scope of this series I felt credit card debt was the single most important issue to address.