The holidays are right around the corner, and along with the Christmas lights going up throughout the Park Cities, so too can the spending. Hot cocoa from Starbucks on the chilly study day, a white elephant gift for the weekend’s Secret Santa get-together and presents for friends and family members become essential, not optional. With the spirit of giving in mind the cards flash and often that is the end of it—until the bill arrives.
According to StatisticBrain.com, 76 percent of college students have credit cards. When students begin charging their credit cards left and right the money does not disappear right away, which is where the trouble comes from.
A 2012 Federal Reserve report shows the total U.S. credit card debt at $793.1 billion, with the average credit card debt per household at $15,799. Additionally, Credit.com reports that the average undergraduate student carries $3,173 in credit card debt, and the average college senior will graduate with $4,100 in credit card debt, based off a study conducted by Sallie Mae in 2009.
Credit cards are not inherently bad, however the potential for debt is great, and that is why some financial coaches will encourage a no credit card policy. Dave Ramsey, author of My Total Money Makeover and Financial Peace, is well known for his strict stance on credit cards. Ramsey encourages people to get rid of their credit cards and use debit cards, running them as credit. That means making purchases with a debit card, but choosing the credit option on the keypad or telling the cashier to process it as a credit card, and then signing instead of using a PIN.
Why run debit cards as credit? You might ask. Why not credit cards? Here are three reasons:
No debt. The cardholder’s spending mentality may be the main problem and the money is still draining out faster than it is going in, but at least the money is gone after each swipe. Using a debit card forces the people to use money they have, not money they hope to get in the future, like a credit card. You will no longer have bills waiting to be paid, and turning into debt.
Better fraud protection. By selecting credit when you use your debit card, you insure that you are protected by the card company’s zero-liability network. In other words, you will not be responsible for any unauthorized transactions. Using your PIN too often gives rise to a greater chance of it getting copied by someone else.
Increased reward points. Some banks are beginning to let you gather reward points with your debit card—when it is ran as credit. It is true that your credit cards get great rewards, and that is often a main reason students get one.
“I got my credit card to use on big purchases and because I wanted to build credit,” said Mary Liz Tuttle, a senior at SMU. “And that’s another reason I have a credit card: the benefits.”
However, Credit.com states that while the rewards on your debit card are not as rich as those for a credit card, in the end the interest on the credit card will diminish the benefits received.
Whether you choose to go credit card free or not, the bottom line is being financially responsible and staying out of debt. If you choose to have a credit card to make big purchases, build credit or gain rewards, remember to achieve those things you must pay your bills.
“Credit score companies want to see a payment structure,” says Armando Bracamonte, Wells Fargo Snider Plaza’s branch manager and vice president. “That’s how you build credit. Pay your bill on time. There’s nothing else to say.”
Lauren Ford, an SMU junior, who has both a credit and debit card, has a plan for staying on top of her spending. “I have an operating budget that I use for expenses such as food, clothing, entertainment, etc.,” says Ford. “Beginning next spring, I am going to be meeting quarterly with a financial planner here in Dallas so I can learn to best manage my money.”
Be wise this holiday season. Avoid debt by finding the best system—paying credit card bills on time or operating with a debit card—for you and sticking to it.
