With limited income, college students need to understand the importance of planning and following a budget, as well as the dangers of credit cards. This lesson provide an outline of budget planning and credit card terminology.
How Can He Afford That?
‘Look at this! Check out my new leather jacket!’
When your college friends show you something they bought, do you get a twinge of jealousy? Just how did he get the money to buy that new jacket when you both work at the coffee shop? Well, maybe we should look just at how George got his new jacket.
Planning and Budgeting
When George was planning for college, his parents helped him apply for scholarships and student loans. He had to sign a lot of paperwork! His parents said there was enough money for tuition and the dorm, but it was still going to be tight this year. They said he was going to have to budget his money. A budget is an itemized plan for income and expenses. His parents send him a little bit of cash each month, which is his income. It wasn’t going to quite be enough to live off of, so his parents suggested he get a part time job to bring in more money. This is where he met his best friend, Bob! Bob is so great. He often loans George money a few days before payday because he’s run out. George doesn’t follow a budget and doesn’t keep track of his money. This is not a good thing! Everyone should follow a budget because it helps prioritize spending and ensures expenses are covered from month to month.
Bob follows a budget. This is how his parents taught him:
- Write down all income. Bob keeps track of money he earns each week from the coffee stop and the money that his parents deposit in his account each month.
- Write down all expenses. Bob makes a list of all his expenses, including his cell phone bill, books, food, entertainment, and other categories that are important to him. He knows how much he normally spends and has a pre-determined limit so he doesn’t overspend.
- Save for goals. Bob really wants a fun Spring Break! He plans to save $800 so that he can go to the beach with his friends. He makes sure he enough money saved each month so that he can make his Spring Break goal!
- Plan for emergencies. Bob’s parents wanted to make sure he had access to money in an emergency. They added him to their credit card which was only to be used in a real emergency if he didn’t have enough money in his bank account. He never uses his credit card for items in his budget.
Beware of Enticing Credit Card Offers
George and Bob do almost everything together – hang out after classes, work at the coffee shop, and they even live in the same dorm! But last week, George went down to the quad alone. There were stalls everywhere giving away t-shirts and bags. All he had to do to get one was to sign up for a credit card of his own! Right then and there, he was pre-approved! The card came in the mail a few days later with his name on it! And today; well, today, he bought his new leather jacket!
George’s best friend interrupted his daydream and asked him how he paid for his new jacket, and George showed him his shiny new card. His friend gave a sigh and asked, ‘What are the terms and conditions?’
Understanding Terms and Conditions
Oh, no! George didn’t know what his friend was asking! Terms and conditions are special rules that are part of a legal contract. George didn’t even look at the terms and conditions of the credit card he was signing up for! Let’s look at some of the most important ones:
- Look at the APR. When you don’t pay the balance on your credit card bill by the due date, the APR – or annual percentage rate – is the method of calculating interest on the unpaid amount. This interest is added to any unpaid balance, increasing the total amount due the next month. Sometimes rates are fixed which means they don’t change; and some interest rates are variable, which means they can change according to different economic conditions. George’s new card starts with a low interest rate, but when you read all the fine print, the rate is only good for 2 months! Then it goes up high. This isn’t good.
- Look at the billing cycle and how interest is calculated. Most credit cards use average daily balance. Average daily balance is the total average balance each day normally divided by 30 for the number of days in the month. Most credit cards use this method if there is a balance from the prior month, but some start charging interest right away! George will have to carry a balance month to month which means he will pay interest. Wow, his jacket just became a lot more expensive!
- See if there is an annual fee. An annual fee is a fee charged every year for having the credit card. Even if you don’t use the card, the company will still charge you this amount to have the credit card! Poor George has to pay $30 every year just to have this card in his wallet!
George realizes that he can’t keep his new leather jacket and returns it to the store. It was actually kind of tight on him anyway! He also calls the credit card company to cancel his account. His best friend gives him a hug, and George asks, ‘What else do you know about this stuff?’ ‘A lot,’ he says. ‘It’s a good thing we’re friends. I’m going to teach you a lot! Tomorrow, we’re going to talk about budgeting so your money can last until payday!’
Plan and make a budget before you leave for college. Talk to your parents and let them help you. Beware of enticing credit card offers and read the terms and conditions. Remember, financial decisions made in college will affect the rest of your life.