Just Say No to Credit Cards

Heading to campus this fall? Before you've even had a chance to buy your textbooks, meet your roommates or scope out the library, you'll probably face a life-altering decision: Should you get your first credit card?

Easy credit abounds on college campuses. Lenders see students as walking dollar signs with fairly low risk. They know you are quite capable of running up sizeable debts, but you're young enough that Mom and Dad will probably help pay your bills if you get in over your head.

Don't get lured into trading your financial well being for a free T-shirt during orientation week. Lenders peddle credit cards like drugs, and plastic can be just as addictive. Card companies will try to persuade you that you need one: that just one card -- even with a low spending limit -- won't hurt and that having a credit card will improve your social status.

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What you won't hear in that pitch is a mention of the dangerous side effects. You will want to get a credit card eventually, but fresh out of high school is not the smartest time for most of us.

Ripple effect

The average college freshman has $1,533 in credit card debt, according to a study by Nellie Mae, a student-loan provider. And that figure grows to $3,262 by the time he or she graduates. (Plus many have thousands of dollars in student-loan debt on top of that.) Half of freshmen carry plastic. And by the time they reach their senior year, 96% do -- with two-thirds of seniors carrying four or more credit cards.

So if everyone's doing it, it can't be that bad, right? Wrong. When the bills come due and interest charges pile up, too many students realize they took on more than they can handle. In fact, 7% to 10% of students will drop out of college due to credit problems, says Robert Manning, author of Credit Card Nation. "The initial freedom offered by credit cards may become financial shackles by the end of their college career," says Manning.

Once you start falling behind financially, you could sentence yourself to a lifetime of high rates on everything from car loans to mortgage payments to insurance premiums. That starter credit card your freshman year of college could potentially wind up costing you thousands of dollars down the road. (Learn more in Why Your Credit Score Matters.)

Training wheels

I know, I know. You're smarter than that. You have rock-solid will power. It would never happen to you..

Some of the smartest, most disciplined people I know have gotten in over their heads with credit-card debt. The siren song of buy now, pay later is tough to ignore. After all, you reason, you know you should start building a credit history while you're young. You've got to learn to use a credit card eventually. And how else will you buy all those textbooks and school supplies (and pizza and beer)?

Stick with a debit card. The fact is, most college students don't need a credit card and shouldn't even dabble in one until their senior year. Instead, cut your financial teeth on a debit card. You'll need to open your own checking account once you go to school anyway (see Freshman Finance 101), and most come with a free debit card. You use it everywhere you would a credit card, and Mom and Dad can stock your account with money each month if they so choose.

Credit cards essentially give you a short-term loan. You borrow money you don't have. Debit cards, however, make good training wheels because they help you learn to manage your spending with real money. When you run out of money, you can't spend any more. Simple as that.

Avoid prepaid cards. Some financial experts advocate that teenagers and college students start with a prepaid credit card that parents can load with money because when the money's gone, it's gone. But such cards are laden with fees. Some charge fees every time you make a transaction, check your balance by phone, or get cash from an ATM -- not to mention many charge start-up fees and monthly maintenance fees. Prepaid credit cards are unnecessary when you've got a fee-free debit card with your checking account.

What about emergencies? Even having plastic for emergencies can lead to trouble. Says a colleague of mine: "I was given a credit card for emergencies -- and the trouble started when there was a sweater I really wanted (and bought) from J.Crew." More often than not, your definition of an emergency can be skewed in the heat of a moment. And you could pay dearly for your lapse of judgment.

Time to graduate

Once you've learned to spend responsibly and honed your financial management skills with a debit card, then you should get your first credit card your senior year of college. However, sign up for one before you graduate because, oddly enough, once you leave school and get a job with a sustainable income of your own, lenders aren't much interested in you. They know your purse strings are probably not tied to Mom's and Dad's anymore. (Find the best credit card deal when you're ready.)

"It used to be that a preferred customer was someone who paid bills on time and paid down debt," says James Scurlock, who made a documentary on debt called Maxed Out. "Now a preferred customer is someone who floats debt, pays interest and pays fees." (See Maxed Out on Personal Debt to read more from Scurlock and his film.)

If you don't get a card while you're still in school, it could be hard to come by later. And you'll want to start building a good credit history to improve your ability to get a car loan, a mortgage and good insurance rates once you're out of school. See Seven Steps to Stellar Credit to learn more about building your credit history from scratch whether you're still in college or already graduated.

Over your head in debt already? See Tame Your Credit Card Debt for strategies to get back on the right track.

P.S. What do you think? When should teens and college students get their own credit cards? When did you get your first one? Please leave your comments on this article below.