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Keep that first credit card after you've paid off your debts

Pizza and plastic got you in trouble, but learn to use credit wisely

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Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question for the CreditCards.com expert

Dear Opening Credits,
OK, I fell for one of the greasy pizza credit card gimmicks. At my school, I, like, applied for and got a credit card because I was really hungry that day. I was really hungry the day I got the credit card, too, because I charged another pizza on it. And I got hungry the next day, too. See where I'm going? Now I have this maxed out card. I'm whittling down what I owe. But once I do, should I cancel the card? Clearly, I have issues with financial responsibility, but I'd like to have a card, too. -- Sherman

Answer for the CreditCards.com expert

Dear Sherman,
As you discovered, pizza and plastic can lead to unpleasant financial problems. But hey, debt is just part of the college experience these days, right?

Wrong. You swapped a temporary problem for one with more lasting and painful consequences.

Assuming the "greasy credit card gimmick" was actually a credit vendor situated near a restaurant, no trick was involved. Enticement? Sure. It doesn't take much for a famished, but cash-strapped student to connect the dots -- get credit, fill belly. It can make sense at the time, too. True hunger is miserable and inspires many to hush a growling belly with a loan. However, though financing meals and other living expenses satisfies a need in the short term, in 30 days, the bill arrives. Without the means to repay all charges, a balance builds. Interest and, sometimes, fees will be added to the amount you charged, increasing the cost. When you're living on little, just keeping up with minimum payments can be tough, and the anxiety and problems begin.

Overwhelming credit card debt is all too common among today's students. According to a Sallie Mae study published in April 2009, the average balance undergraduates carried last year was $3,173. (See more from this study in the Young Adults section of our Credit card statistics page.) Of course, there are many good reasons for all this bad debt. Education is expensive, and tuition, books, materials and essential living expenses add up fast. Still, many rely on credit cards to pay for things that definitely aren't essential, simply because it's so easy to slap down the plastic.

I'm happy that you recognized and are addressing the problem. As you may have discovered, the fastest road to recovery is to make large, steady payments while suspending charging until the card is paid in full. Your question, however, is what should you do once you're back in black -- maintain or cancel the account?

My vote is to keep that credit card active. Here's why: You've already established a credit history with that creditor, which is great for your FICO score (the scoring model developed by FICO, formerly known as Fair Isaac, and the yardstick most commonly used by lenders to assess risk and set credit and loan terms). When you graduate and start to look for a job, car and home, a positive score and credit history will be essential. While your debt-to-credit-limit ratio and payment history carry the greatest weight, the next most important factor is your length of credit history. A long, positive record with a credit card company is advantageous. So rather than close the card and start anew, pay it off and use it again, but do it wisely this time.

So how do you use credit well? As you wrote, you have issues with fiscal responsibility. Again, you're in good company. That same Sallie Mae study found that 84 percent of undergraduates said they needed more education on financial management topics. So here is a quick lesson in smart credit management:

  • Always review your cash flow before charging. Will you have enough money to pay the balance in full by the time the bill arrives and still cover all your necessary expenses?
  • If the answer is yes, go for it, but keep a running total of what you spend.
  • Before charging again, evaluate your new balance and cash flow, then determine if you are still in your payment comfort zone.
  • Stop charging the moment you know you won't be able to repay the entire balance.
  • When your bill arrives, pay before the due date.

Simple, right? You can stay on track with a budget. Know exactly how much cash you have to work with each month, then map out what you need to pay for. Expenses must fit snugly within your income. If they don't, you may start to overcharge again, and you'll be right back where you started. 

If, in the course of your studies, you took Latin, you may be familiar with the compact but mighty little phrase "mea culpa" -- popularly translated to "my fault." Acknowledge that the credit card company that set up a table close to the pizzeria did little more than make a smart marketing choice. Now you make an even wiser one -- use credit cards as the payment tools they are and find less expensive ways to keep your hunger at bay.

See related: 10 things you must know about credit scores and reports, 8 tips to keep rates and fees low, How to read, understand your credit report, 8 things you must know about credit card debt, Understanding how minimum payments are set, Issuers offer new tools to educate consumers, Credit card statistics

Erica Sandberg is a nationally renowned personal finance authority. She’s host of several financial web shows, and a frequent guest for media outlets such as Fox, Forbes, Nightly Business Report and NPR. Erica previously was affiliated with Consumer Credit Counseling Service and was KRON-TV’s on-air credit expert. Her book, "Expecting Money: The Essential Financial Plan for New and Growing Families," was published in 2008 by Kaplan Press.

Send your question to Erica.

Published: April 22, 2009


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