Earning an F in Personal Finance

We know how those Abercrombie & Fitch capris and late-night pizzas can add up. And with credit-card companies aggressively peddling plastic on college campuses, it's easy to see why an increasing number of college kids solve their financial fixes by becoming credit-card junkies. But while these probably aren't the words you want to hear, in this case, father really does know best. This is one extra-credit assignment that could do you more harm than good.

While $900 may not seem like a staggering amount of debt, as you admit, paying it off with a low-paying, in-between-classes job could be tough. If you're making only minimum payments (which could be as low as 2% of your total balance) on a credit card that charges 14% interest, it will take more than six years to kiss that debt goodbye. And that's only if you never charge another penny on the card.

We'll admit, though, there are a lot of college kids in worse financial straits than yours. According to a year 2000 report from the American Council on Education, 46% of undergrads carried a monthly balance on their cards, with the median balance being $1,600. Figures released that same year by Nellie Mae, the student-loan provider, based on students who supplied credit information, were even more disturbing. They showed that 78% of this group carried credit cards, with the average number of cards held being four. In this case, the median balance was $4,776. Even worse, 20% of this group owed somewhere between $6,000 and $15,000. Talk about inescapable debt.

How can this happen? Well, the credit-card companies aren't stupid. They're willing to let their traditional requirements for card eligibility slide in order to lure in customers while they're young, says Ed Mierzwinski, Consumer Program Director at U.S. Public Interest Research Groups (PIRG). Research has shown that young consumers will stick with their current card company as they get older, according to information provided in the 2000 survey by state PIRGs. That's why card companies are in student unions, peddling free T-shirts and Frisbees in exchange for what can potentially become lifelong debt. According to PIRG's survey, 80% of the kids who apply for credit cards on campus cite free gifts as the reason for applying.

And not only are college kids racking up loads of debt, but perhaps more damaging, they aren't paying their bills on time. As many as 48% of students with one or more cards paid a late fee, according to PIRG's survey. And 7% had a card cancelled due to missed or late payments. Having black marks like that on your credit report could haunt you for years. That's because credit bureaus, like Experian and TransUnion, record all your credit transactions on your credit report, which, in turn, determines that credit score your father keeps going on about (otherwise known as a Beacon or FICO score). Slip up with any late or missed payments, and these blemishes will be on your report for up to seven years and will no doubt hurt your score. Lenders use this information to determine whether to give you a mortgage, a car loan or another credit card, so it's crucial that you keep your credit history squeaky clean, says Gerri Detweiler, author of "The Ultimate Credit Handbook." In extreme cases, a poor credit score may even affect your ability to get a job.

So clearly, the thing to do here is to pay this debt down now, before it gets any worse — even if it means working a few extra hours at your job each week. Review your expenses and income so you know exactly how much disposable income you have each month. Once you've figured out your cash flow, you can create a specific plan and figure out how long it will take to pay off the debt.

Another strategy is to lessen your debt burden by lowering the interest rate you're paying. Anything above 14% is considered high right now, says Detweiler. If you can lower your rate, more of your monthly payments will go toward eliminating your debt.

First, try negotiating with your current credit-card company to see if you qualify for another program with a lower rate. If that doesn't work, start shopping around for another card. If you do decide to get a new card and transfer your balance, make sure you close out the old account to stave off any temptation. There's no point in using this strategy if it just provides you with another outlet for charging up more debt.

Visit our Debt Management Center for more information on how to dig yourself out of debt