ARCHIVES :: NOVEMBER 2002 :: ON CAMPUS

Avoiding
The Debt Trap

Heading to College? Don’t Let
Credit-Card Temptations
Take Charge of You

By HARLAN COHEN
Special to The Wall Street Journal

You might not realize it, but at this very moment, there are people who are preparing to give you thousands upon thousands of dollars to spend in college, on whatever you want. All you have to do is be a breathing human being.

Oh, and you have to pay it back someday.

Illustration: Steven Salerno

They are credit-card companies, and assuming that you are breathing, you won’t be able to avoid them when you arrive on campus. In fact, you will soon see that getting a credit card is as easy as getting athlete’s foot in the dorm showers. But the potential dangers are far worse than an annoying itch. Credit is power. And sometimes, the power of credit can spin you out of control. Just listen to “The Tale of Daryl’s Debt.”

The Lure of the Card

 I met Daryl Miller while attending a college activities conference in Tulsa, Okla. Daryl grew up in a single-parent home in rural Pennsylvania. Life at home was good for Daryl. Then he went off to Grand Junction, Colo., to attend Mesa State College. He was on his own financially, and having seen his mom get mired in credit-card debt—to the point of having to declare personal bankruptcy—he vowed to never let that happen to him.

Then he felt the lure of the card.

Daryl signed up for his first credit card within days of arriving on campus. It all happened so fast. It was at a new-student welcome fair. As a signing bonus, he received a T-shirt and a Nerf mini football. “We used the football to play around in the residence hallways,” he recalls. Before long, he would sign up for a couple more cards and collect more prizes. Two cards went into his drawer and one went into his wallet. He swore to himself that he would only use the card for an emergency.

Several months later, he had just such an “emergency,” when a pair of Nike running shoes confronted him at the mall and demanded to be bought.

“I’ll never forget it because I didn’t have the money to pay for them,” he recalls with a smile. He knew he was getting paid at the end of the month, but he wanted the shoes that day. So, he reached into his wallet and waved the magic card.

“It was mystical,” Daryl says. “It was the feeling that my money wasn’t being taken away.” When the statement arrived, he paid off the balance in full. But that was the last time Daryl saw a zero balance for years.

‘I Just Went Crazy’

 It was the summer after Daryl’s freshman year when the charge card took charge of him. “I just went crazy,” he says. “I wanted new clothes. I didn’t want to work. I wanted to visit my family. I maxed out my first card at $2,500 while buying books after that summer.”

That should have been a warning sign that Daryl needed to stop charging and start paying down his debt.

But instead, he reached into his drawer and discovered cards No. 2 and 3. And that’s when Daryl’s debt started to get oh-so-ugly.

He began using his credit cards for “emergency” ski trips with his friends, airplane fares, hotels, clothing, groceries and books for classes.

The ski trips were exhilarating. But it was all downhill from there.

One problem: His friends were from wealthy families, and he wanted to live the life. The card gave him the power to do so. But his friends had parents who paid off their balances for them. Daryl could barely meet his monthly minimums.

By the time senior year rolled around, Daryl was broke, in debt, stressed out and all but maxed out. The little money he made from working in the residence halls paid for his car, the insurance, and a minimum monthly credit-card payment, enough to keep the collection agencies away. But with a balance over $8,000, and meaningful payments beyond his means, he was chasing a balance that couldn’t be caught. Factor in an interest rate of 17.9% (not that he knew the exact rate) and he was paying roughly $1,432 in annual interest. With no cash to spare, he was forced to use what little credit he had left to charge groceries and necessities, adding to his debt load.

“It was so stressful,” he says, rubbing his head.

Mountain of Debt

 Daryl graduated with a mountain of debt rivaling the Rockies he called home. His first job brought in a salary of $35,000. After taxes, rent, a car payment, insurance, living expenses and credit-card minimums, he was left with $150 a month. Seeking to save up for graduate school, he was forced to take a second job to pay down his debt. Working day and night, he managed to whittle his balance back to zero. It took a year and a half.

 “It was so great!” he explodes. Now a 27-year-old graduate student, Daryl sees his credit crisis with clarity: “I was 18 years old. It was a mystical idea—I would travel. It wouldn’t be on a budget. It was like free money.”

Free, except for the 17.9% interest.

Daryl learned his lesson the hard way. Unfortunately, that’s the way a lot of college students learn it. Like the one student I spoke to who finally had to cut the magnetic strip off his credit card to prevent impulse buying. Or the student who secretly opens new accounts and hides bills from her dad. Then there was one who got a card with a $300 limit, maxed it out, and skipped out on the bills over summer break. A collection agency tracked her down. Her parents bailed her out, paying $600 including late fees and interest. As a result, her credit history is a mess. She’s afraid to lease an apartment for fear of a credit check.

It’s easy to get credit cards in college and even easier to get into credit-card trouble. The best approach is to get one card and use it prudently to establish a credit history, not an expense account. You need good credit to help lease apartments, finance cars and, eventually to get a mortgage to buy a home. But bad credit will haunt you for years. That’s why you must pay bills on time and never spend money you don’t have.