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.
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
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.
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
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
the answer is yes, go for it, but keep a running total of what you spend.
charging again, evaluate your new balance and cash flow, then determine if you
are still in your payment comfort zone.
charging the moment you know you won't be able to repay the entire balance.
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
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
Erica Sandberg's articles and insight are featured in such publications as the Wall Street Journal, Pregnancy, Babytalk, Redbook, Bank Investment Consultant, Prosper.com, MSNMoney.com, and Smartmoney.com. An active television and radio commentator, Erica is the credit and money management expert for San Francisco’s KRON-TV, a frequent guest on Forbes Video Network, Fox Business News, Businessweek-TV, and all Bay Area networks. Prior to launching her own reporting and consulting business, she was affiliated with Consumer Credit Counseling Services of San Francisco where she counseled individuals, conducted educational workshops, and led the media relations department. Erica is a member of the Society of American Business Editors and Writers, and on the advisory committee for Project Money.
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