collage of money, charts, student working and graduating

Of Credit Cards and Spring Break

The University of Missouri is just finishing up our Spring Break.  As I visited with students last week about their plans for the break I heard everything from “My Spring Break will be in the library studying” to trips to locations all of the United States and even overseas trips (most of the locations involved a warmer climate than was predicted for here in Columbia, though!).

The question of how students pay for these trips is always an interesting one – some consider it part of their “education expenses” and use student loans, some student’s parent’s help out with a portion or all of the trip, a few save up for it, and some use a credit card.

In this article I would like to address the last two strategies – paying for it with a credit card and saving up for it.

CREDIT CARDS

I pulled up some statistics recently about credit and credit card[1] usage. Here are a few highlights:

  • 75% of families carry credit cards
  • 58% of those who have a credit card carry a balance
  • Americans carry $796.5 Billion in revolving debt – 98% of that is credit card debt
  • The average balance per household with credit card debt is $14,750
  • The average number of credit cards a person holds is 3.5
  • The average APR on new cards is 14.73%; of those that carry a balance the average is 13.67%
  • 39% of freshman start college with a credit card already in hand
  • 84% of students carry a credit card
  • 50% of students carry 4 or more credit cards
  • The average undergraduate graduates with a $2200 balance on their credit cards

Let’s say that a student is going on Spring Break and they figure that with plane tickets, hotel, food and entertainment they are going to spend $1000. They have their shiny new card with a 14.73% interest rate and charge the whole trip on there.

Using the Credit Card Repayment Calculator[2] on the Federal Reserve Website if the student pays the minimum balance it will take them 7 years to pay that $1000 off and they will pay $560 in interest! They add more than 50% to the cost of their trip with interest.

There is a better way – let’s visit it here:

SAVING

I know this is a theme that is revisited over and over – but saving up and paying cash is almost always going to be the best option – especially for something like a Spring Break trip. One of my favorite budgeting tools is something I call Revolving Savings. Basically you sit down and map out the next 12 months and put everything in there that you might spend over the next year that is known, but irregular. Here is an example:

January

 

Birthday $20

February March

Spring Break $1000

April
May June July

Car Registration $90

August
September October November December

Christmas $200

Obviously this example is simplified and you are likely to have more expenses than listed here, but it gives us a good guideline. Include everything you can think of that you know is coming up, but isn’t on your regular monthly budget.

Add all the numbers up and you get a grand total of $1310. Divide that by 12 and you get $110, which becomes a line item on your budget. If $110 seems high you need to visit each line again. Do you really need to spend $1000 on Spring Break? Maybe not – you can probably find some lower cost destinations, and you can usually save money by buying things like plane tickets ahead of time. Once you come up with a final number transfer that amount to savings each month, then as expenses come up simply transfer the needed amount to checking.

My wife and I sit down every December and map out the next year. We look at what we spent the previous year and we try to anticipate what may come up the next year and how much we want to spend on it. This budgeting tool can help you save interest on an item that you should be paying cash for.

For those of you just getting back from Spring Break that charged it on their credit cards – I encourage you to look at how you can get your trip paid off as quickly as possible. Memories from a trip are wonderful – the bills that come later – not quite as much fun.


[1] http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php

[2] http://www.federalreserve.gov/creditcardcalculator/