Lisa Fu wrote this article for The Red & Black. To read the original article, click here.
For many college students, entering university is a transition period in which they slowly depart from their parents’ money flow and become more financially independent.
Many students work part-time to pay their monthly rent, learn to buy their own groceries and some realize that their checking account may not be as large as they had hoped.
Learning about credit scores, credit cards, balancing a budget and financially planning are all essential personal finance skills.
“I think there are all sorts of ways to manage money,” said Brenda Cude, a professor in the Department of Financial Planning, Housing and Consumer Economics at the University of Georgia.
Credit cards work differently from checks and debit cards.
Swiping that piece of plastic does not automatically make the purchase free. Instead, when a person makes a purchase on a credit card, they are using the bank’s money to pay for that good or service at that time.
The arrangement is that when the statement arrives in the mail, that person must use their own personal money to pay for their purchase back to the bank.
A credit card acts as an IOU so the user can pay later when they have the money.
If they pay the bill on time, in full, they only have to pay for whatever the good or service cost. If they make the payment late, the bank charges interest and the person must pay for the good or service in addition to the interest.
“We know from research, not necessarily on college students, that there are people that use credit cards just for convenience, people that use credit cards just to carry a balance, and then there are people who do some of both,” Cude said.
Those who have an independent personal credit card without anyone watching out for them, but are not good financial planners, often find themselves in credit card debt, she said.
Cude said credit cards are especially helpful for those that need to make an emergency purchase when they do not currently have the money but know they can pay it later.
But credit cards can also be used for daily non-emergency purchases. And as long as one pays their debt on time, using a credit card can help a student build their credit score, Cude said.
“I have two credit cards,” said Tracy Bucknor, a senior management major from Conyers. “One is a bank card and one is a Target credit card, so I only shop at Target for that one.”
Bucknor said her mother educated her about personal finance, telling her to always pay the credit card off immediately and “don’t use money you don’t have.”
Bucknor knows her credit card limits and keeps her purchases below $100 for each of her cards. To avoid accumulating interest on her purchases, she often pays the bill in advance.
“I always have the $100 so I use my credit cards to build my credit score,” she said.
Because of her consistency, Bucknor currently has a high credit score of 750.
Compared to past years, more UGA students are choosing debit cards over credit cards, Cude said, estimating that around one third of her class used debit cards.
Debit cards, unlike credit cards, draw money straight from the user’s bank account.
Brendan Sexton, a senior real estate major from Dunwoody, prefers to use a debit card rather than a credit card.
“I can manage a debit card better with my own spending habits,” he said. “I have an allotment every two weeks and I budget from there. I have an additional part of my budget for emergency funds and for fun.”
Savings and Investment
With young people right out of college, saving money is a challenge, said Andrew Carswell, a professor in the Department of Financial Planning, Housing and Consumer Economics.
Between trying to pay off college debt, finding an affordable place to live and dealing with the small salaries of a first job, Carswell said saving often gets put on the back burner.
“It’s very hard,” he said. “I get it. It’s very hard to save.”
Carswell referred to the early 20s for a student as “sort of treading water years,” but recommended students have a net worth matching their income by the time they turn 30.
As people approach retirement years around 65, their net worth should be 10 times their annual income.
“Saving about 10 cents on the dollar is a recipe for good things down the road,” Carswell said.
With students who can afford to save a little bit here and there, Carswell encouraged they invest their money in an IRA account as soon as they can.
An IRA, as Carswell explained, acts as an investment account. Rather than investing in individual shares, however, an IRA provides more security because it is less volatile.