Student’s Guide to Avoid Credit Card Debt & Build Financial Health

In today’s society, credit cards have become ubiquitous and are often considered a convenient financial tool. However, when it comes to college students, obtaining a credit card can have serious repercussions on their financial well-being. This blog aims to shed light on the potential dangers of credit card usage for college students, backed up by relevant statistics. By understanding these risks, young individuals can make informed decisions about their financial future and develop healthy financial habits from the start.

“Credit cards are like chainsaws: handy tools if used properly, but dangerous in the hands of the untrained.” – Dave Ramsey

• Financial Indebtedness: Obtaining a credit card in college can lead to significant financial indebtedness. According to the Federal Reserve Bank of New York, outstanding credit card debt in the United States reached a staggering $868 billion in the first quarter of 2023. Furthermore, a study conducted by the All India Debt and Investment Survey in 2022 revealed that 43% of urban Indian households have outstanding credit card debt. These statistics highlight the alarming trend of individuals, including college students, accumulating debt through credit card usage.
• High-Interest Rates: Credit cards often come with high-interest rates, especially for individuals with limited or no credit history. The average credit card interest rate in the United States is around 16.22% as of June 2023, according to the Federal Reserve. Similarly, in India, credit card interest rates range from 36% to 48% per annum, as reported by the Reserve Bank of India. These exorbitant interest rates can quickly compound the debt burden for college students, making it challenging to repay their balances and leading to long-term financial strain.
• Impacts on Credit Scores: Mismanaged credit card usage can have adverse effects on credit scores. A low credit score can hinder future financial opportunities, such as obtaining loans or securing favourable interest rates. In the United States, credit scores range from 300 to 850, with an average score of 711. Late payments or high credit utilization ratios resulting from credit card usage can significantly lower one’s credit score. Similarly, in India, credit scores range from 300 to 900, with a score below 650 considered unfavourable. Maintaining a good credit score is crucial for future financial stability and should be a priority for college students.
• Financial Education Gap: Many college students lack the necessary financial education to handle credit cards responsibly. A study conducted by the Financial Industry Regulatory Authority (FINRA) in the United States found that only 27% of college students demonstrated basic financial literacy. This lack of knowledge can lead to poor financial decision-making, overspending, and accumulating debt. In India, financial education among college students is also limited, exacerbating the risks associated with credit card usage.
• Alternative Financial Tools: Instead of relying on credit cards, college students should explore alternative financial tools that can help them manage their expenses effectively. Debit cards, for instance, allow students to make purchases using their own funds without the risk of accumulating debt. Debit cards are widely accepted and offer similar convenience as credit cards but without potential financial pitfalls. Additionally, mobile payment apps like Apple Pay, Google Pay, or Paytm in India provide a secure and convenient way to make transactions without the need for a physical card.
• Budgeting and Financial Discipline: College is a crucial time for students to learn about budgeting and financial discipline. By avoiding credit cards, students are forced to live within their means and develop responsible spending habits. Creating a budget, tracking expenses, and prioritizing needs over wants are essential skills that can benefit individuals throughout their lives. Instead of relying on credit, students can focus on building emergency funds and saving for future goals.
• Building a Strong Financial Foundation: College students have a unique opportunity to start their financial journey on the right foot. By avoiding credit card usage, students can focus on building a strong financial foundation. They can concentrate on their studies, explore part-time job opportunities, and work towards graduating with minimal debt. A solid financial foundation allows students to have more control over their future and opens up opportunities for financial success post-graduation.
• Seeking Financial Advice and Support: Students should actively seek financial advice and support from trusted sources. Universities and colleges often have resources such as financial aid offices or counselling centres that can provide guidance on managing finances effectively. Additionally, seeking advice from parents, mentors, or financial professionals can help students make informed decisions about their financial future. By arming themselves with knowledge and support, students can navigate the complex financial landscape and make responsible choices.

Way Ahead Plan For Students

Creating a way ahead plan for students to avoid the credit card trap is crucial in helping them develop healthy financial habits. Here are some steps that students can take:

• Financial Education: Encourage students to seek financial education resources and courses that teach the basics of personal finance. This can include understanding budgeting, saving, investing, and credit management. Many colleges offer financial literacy workshops or courses, and students can also explore online resources, books, and podcasts focused on personal finance.
• Set Clear Financial Goals: Students should define their financial goals and aspirations. Whether it’s saving for emergencies, paying off student loans, or planning for future expenses, having clear objectives helps students stay focused and avoid unnecessary spending. Encourage them to create a realistic budget that aligns with their goals and guides their financial decisions.
• Establish an Emergency Fund: Encourage students to start building an emergency fund (No Udhari Fund) as early as possible. Having a financial cushion can help them avoid relying on credit cards for unexpected expenses. Advise students to save a portion of their income or any windfalls they receive towards this fund. Aim for an emergency fund that can cover three to six months’ worth of living expenses.
• Track and Monitor Expenses: Students should regularly track and monitor their expenses. This can be done using budgeting apps, spreadsheets, or even a simple pen and paper. By keeping a close eye on their spending, students become more aware of their financial habits and can make adjustments as needed.
• Avoid Impulsive Purchases: Encourage students to practice mindful spending and avoid impulsive purchases. Encourage them to wait at least 24 hours before making significant purchases to assess whether it aligns with their financial goals and priorities. This habit helps students differentiate between wants and needs and make more informed decisions.
• Seek Peer Support: Encourage students to form or join a peer support group focused on financial wellness. They can share tips, challenges, and successes, and hold each other accountable. Peer support can provide motivation and encouragement to stick to financial goals and make responsible financial choices.
• Develop Healthy Spending Habits: Encourage students to cultivate healthy spending habits that promote financial well-being. This includes distinguishing between needs and wants, practising delayed gratification, and avoiding lifestyle inflation. By being mindful of their spending habits and making conscious choices, students can avoid unnecessary expenses and allocate their resources towards their financial goals.
• Build Credit Responsibly: While it’s advisable for students to avoid credit cards in college, they can still start building credit responsibly. Students can consider alternative methods to establish credit, such as becoming an authorized user on a parent or guardian’s credit card or applying for a secured credit card with a low credit limit. Emphasize the importance of making timely payments and keeping credit utilization low to maintain a positive credit history.
• Engage in Part-Time Employment: Encourage students to explore part-time job opportunities while in college. This not only provides them with additional income to cover expenses but also instils a sense of financial independence and responsibility. Earning their own money can help students appreciate the value of hard work and make them more cautious about their spending.
• Learn from Others’ Experiences: Encourage students to seek advice and learn from the experiences of others who have faced financial challenges or made mistakes with credit cards. This can be done through personal conversations, reading personal finance blogs, or participating in online forums dedicated to financial discussions. Learning from real-life experiences can help students make informed decisions and avoid repeating common pitfalls.
• Regularly Review Financial Plan: Students should regularly review and update their financial plans as their circumstances change. This can include adjusting their budget, revisiting their financial goals, and reassessing their spending habits. Encourage students to conduct periodic check-ins to ensure they are on track and make necessary adjustments to stay financially healthy.
• Seek Professional Advice: Students should seek professional financial advice when needed. Financial advisors or credit counsellors can provide guidance on managing debt, improving credit scores, and making smart financial decisions. Students should research and choose reputable professionals who have their best interests in mind.

By following these steps and incorporating financial responsibility into their daily lives, students can avoid credit card debt and build a solid foundation for their financial future.