This week I have been highlighting tips and tricks for the family that is planning for their student that is on their way to school in the fall. With articles 1 “the cost of an education” and article 2 “what is a healthy student diet” about student finances, this would officially be part 3 in the series. Today I take a slightly different look at finances and think about common mistakes that students make and how to avoid them:

1. My power’s been cut-off
2. The credit card
3. Mom, can you take fluffy?
4. The second job
5. The car loan

1. My power’s been cut-off

There is no reason that this should happen to anyone. Have system for paying bills. This is one that I recommend:

1. when a bill comes in open it immediately.
2. check your monthly budget and if it is the same or less than what was budgeted than take a note
3. if it is greater than, make sure there is enough to cover it in your rainy day fund
4. go to your bank account(s) and pay it immediately
5. keep the receipt of the bill (record of payment) in a file labeled “month”, so if it is the month of may, the file folder will be labeled “may” and will contain all of the bills from may. You can also keep loan documents, receipts and any other important financial documents for may in this file.
6. at the end of the year, compile all of the files from

This system is greatly enhanced if you can bank online or over the phone. If for any reason you cannot pay a bill on time, call the company in advance and explain your situation to the. Ask them if you can pay them late without loss of credit or having your services removed. Most companies are extremely reasonable if you contact them in advance.

2. The credit card

The Financial Consumer Agency of Canada reports 85% of Canadians own a credit card, and 58% have at least two. Sadly, roughly one third of these people aren’t exactly sure what the annual interest rate is on the card they use the most. While the federal agency doesn’t break things down by age, it is highly likely that students are even less aware of credit card costs than their parents – which is too bad since cash-strapped students are the very ones who can least afford costly plastic. Most of them haven’t developed a credit history, have little, if any, disposable income and, in many cases, already have student loans to repay.

Regardless, the abundance of on-campus offers giving low introductory rates, freebies, and bonus airline miles, are going to get a lot of students into trouble. Many students struggle because they think having a credit card makes them grown up and independent, or because they want to keep up the lifestyle their parents provided them at home or, worse still, they like the lifestyle of some of their new, wealthier friends.

Universities and colleges themselves play a huge role in the current trend of high student credit card debt. Over the years, many welcomed credit card issuers but now, worried about pressure sales, most are trying to monitor or even restrict the activities of credit card companies on campuses.

Still, credit cards can be a useful tool for students. Here’s what you need to know before getting a credit and getting in over your head:

Read the fine print

Many cards offer low or no-interest introductory rates, however these are usually good for only a few months. Students without a credit history should try to find a credit card with an annual percentage rate that matches their age – around 18 or 19% or lower right now. Not a bargain by any means, but a competitive rate.

For a good overview of what’s available on the market, the Financial Consumer Agency of Canada regularly publishes a cross section of credit card information. Go to:

publications canada
Stay on top of things

Try to pay off your balance in full each month. If this isn’t possible, make sure you send more than the minimum payment required. You can still accumulate debt by making the minimum payment. Figure 1 demonstrates how one person making the minimum monthly payment vs. a second person making more than the minimum monthly payment on a credit card debt of $1000 with a yearly interest rate of 18% will fair over time. Using minimum payments of 2.5%, it will take person one 153 months to get rid of their debt, and will pay $1,115.44 in interest (more than the initial value of their debt!). Person two makes fixed payments of $50.00, and it only takes 24 months to get rid of the debt, and he/she will pay a mere $197.83 in interest. Remember, your credit rating, a numerical measure of creditworthiness used by lenders to determine whether you’re a good risk, can be affected by late payments or a visit from a collection agency.

Figure 1. Person one pays the minimum monthly payment vs. a second person making more than the minimum monthly payment on a credit card debt of $1000 with a yearly interest rate of 18%.

It’s also a good idea for new users to stay within their credit limit to avoid penalties and reserve available credit for emergencies. Demonstrate that you have financial capacity – the ability to pay back your debt – by keeping your account balances less than 50% of your available credit.

To understand how debt, interest and payments work, take some time to see what you can afford at this website:

http://www.creditcanada.com/debtCalc.asp

Prepaid cards

Prepaid cards allow you to set spending limits and monitor where you are spending your money, both through monthly statements and through Internet accounts that show daily transactions. They work in a similar way to gift cards, in that they’re preloaded with cash. You transfer money from your own chequing accounts to the card which can then be used like any other credit card to make purchases.

But prepaid cards aren’t cheap: one product, MyCard (now operating as HorizonPlus), costs $39.95 to sign up, plus a $5.95 monthly maintenance fee and $2.95 each time you reload the card with cash.

Shop around

Card companies often target university students, however the best rates are typically found off campus. According to some studies, half of all college students have more than one credit card, compared to roughly 38% nationwide. Most have paid a late fee at some point, and the likelihood of that increases with the number of cards owned.

Paying bills on time is extremely important and if you get a credit card, it should fall into the top of your list of things to do each month. A credit card means a credit history, and a poor payment history can translate into big trouble when it comes time to buying a car or renting an apartment.

3. Mom, can you take fluffy?

If you are considering a pet for company, consider this: pets need money and attention for the next ten-twenty years of your life. You cannot travel the world without finding someone to watch them. Vacations also require pet sitters. Cats require litter and food, dogs require food, bones, toys and daily walks. Smaller pets need cages and litter. All pets will have to see the vet at least once in their lives, but as a pet owner I can tell you, your pet will get sick the same month you have spent the pet budget. Saving for pets is really important. Pet health insurance is a possible consideration. Once you commit to the responsibility of a pet, remember that a constant fixed cost is associated with that responsibility and be sure you can afford it so that you avoid this mistake.

4. The second job

Many students work while they are in school. I have personally taken a second job while in school. If this has to be done, I recommend taking a job at the school. There will often be job postings with the university in the financial aid office, in each department, in the library and the career center. Try to keep your work hours to less than 10 hours per week so than you can continue to concentrate on your studies and still find some time for fun and down-time.

Another aspect of your job is that it should be higher than minimum wage and, if possible, should give you skills that will apply to your career later in life. Approach professors that teach courses you have taken an interest in and ask if they have any positions or know of anyone in the field that could give you any useful job experience.

Do not work for many hours at a low paying job in a field that is not rewarding. This will only cause you to be mentally, physically and intellectually drained. You cannot function as a student to your fullest potential when you are being pulled too far in too many directions. A friend I know had a job like this at a movie theatre while he was doing his chemistry degree. He was always an excellent student and had a reputation for being very bright. While the job at the theatre was not difficult, it wasn’t until he quit that job and took on a job in a research lab at the school that his full potential was fulfilled and his grades increased even higher and he became the highest scoring student in the chemistry program.

5. The car loan

One of the biggest mistakes that students and new graduates make is buy themselves a new car before they have gained any appreciable assets. Bear in mind that cars depreciate as soon as you drive them off the lot. Saving to buy a home or investing in other types of funds and accounts with returns is a much wiser place to put your money. When you get a car loan to pay for this depreciating item, the interest on the loan only compounds the loss on your investment. So the lesson here: don’t buy a car unless you can pay for it in full. This usually means that your first car will be used – if you can afford one at all. Remember all of the extra associated costs of owning a car that will also go into your budget:

• Insurance
• Gas
• Maintenance

Try to live close to school and walk, ride a bike or take public transit. It will save you a bundle!

This post was featured in The Carnival of Personal Finance #152

Tags: academic, budget, Finances, Student

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