To a student, future may seem bleak. Will there be a jobs available? Will they pay enough to survive? The best way to be prepared is to not go into the job market already burdened. And since so much debt originates from this time of year, having a responsible holiday season is the place to start.

University blogs have been busy with great ideas for gifts and even better advice for shopping. Below is a round-up of our favorites.

Stonybrook University put together a wide swath of helpful tips for a safe online shopping experience. The advice covers a broad range of topics and laid out as a checklist of safety:

• What to be watchful for while using your credit card online
• What to do if you’re a victim of fraud or encounter problems with the online store
• Links to extra resources for more information

The Student Money Management Center at the University of North Texas put together a Top 10 list for “surviving the economy this holiday season“. Individually each point is a good idea, but together these tips become a necessity of a wary economy.

North Carolina State’s “Enjoying the holidays without going broke” is very thoughtful and inspiring. Writing for the Family and Consumer Sciences NC Cooperative Extension, Christine W. Smith covers gifts that can be inexpensive…and life-changing: Making gifts, helping those in need, and forgiving past grudges—what the spirit of the holidays should be about.

In the same vein, but less egalitarian, come practical recommendations from Texas A&M. “And may all your Christmas budgets be in the black” from Kathleen Phillips gives practical advice for creative gifts and not overspending, including: Making gifts, teaching a loved one a new skill, and committing to spending time together.

On the positive side, this economic crisis will force us to control our spending and reel in our materialism. Some say this is long over due, evidenced by the large amount of credit card debt the average consumer carries. More credit cards is not the answer, but a smart selection from the best student credit cards can make a difference.

Can I use gift cards to buy gas?

The short answer is yes. But before you rush off to the pump to use gift cards for your gas, there are some things you’ll need to be aware of. The most important thing: If you want to pay at the pump, think again, unless your gift card has a balance over $75.

“Before you are permitted to pump gas, many pumps seek a pre-authorization for $75… ”

“If you have insufficient Available Funds on your Gift Card to cover the Pre-Authorization Request, your attempt to use your Gift Card at the pump will be declined.”

American Express Gift Cards FAQs

Do I have to purchase $75 in gas when I use a gift card?

Unless you pump $75, you will not be charged that amount. Pre-authorization is just a method used to prevent criminals from driving off with gas they have not paid for. You will pay for what you pump. If your gift card has a balance less than $75, you’ll likely need to pay the gas station attendant, as you will not have enough for pre-authorization. Most gas stations will accept the gift card, used just like a normal credit card.

Can I use a gift card to buy groceries?

Gift cards can be used to buy most anything. As long as your grocer takes student credit cards, a gift card should be accepted. However, not all grocery stores accept credit cards or gift cards. It’s always best to inquire ahead of time to avoid difficulties or confusion. Always know your available balance. Most gift cards should have an 800 number on the back to help you confirm the balance. If you go over the available balance, the merchant may be able to accept a second form of payment in the same transaction. This is called a split-payment transaction.

Can I use a gift card in a split-payment transaction?

This depends on the policies of the store. Also, some cash registers, POS systems and other sales equipment are designed to handle split transactions, while others may not be. If your grocer cannot process a split-payment transaction, consider making two separate purchases.

Momie Tullottes

One of the vital lessons everyone must learn when dealing with personal finances is how to understand limitations and weaknesses. We all have certain temptations and limitations. It is important to understand these when using credit cards because our weaknesses often get us into debt. This is why it is important to carefully evaluate credit cards — including cash back credit cards — and consider our spending habits.

“…excessive borrowing belongs not only in the same general family with insufficient savings, but also with insufficient exercise, obesity, poor diet, and excessive smoking and drinking.”

Boundedly Rational Borrowing, Cass R. Sunstein

When you apply for a credit card, it is important to honestly look at yourself and your finances. Realize you might be tempted to spend a lot just to take advantage of the rewards. Can you resist that temptation? Do you realize that if you carry a balance, then the cash back credit cards cannot make up the interest charges you pay? Know your potential weaknesses and do your best to avoid the temptation to overcharge and keep your credit card spending in check.

If you already have credit card debt it’s important to get out as soon as you can. Create a plan of action that is likely to help you get out of the hole. One tactic can be to use low-interest credit cards. When you transfer your higher-interest cards to low-interest credit cards, you can put more money toward the principal and pay off your debt faster. However, you need to know your limitations. Will you put more debt on the cleared credit cards? If so, you should make sure to cancel the cards as soon as you make the balance transfer to low-interest credit cards. It is important to periodically evaluate yourself and to understand the types of problems you are likely to have when you get involved with credit cards.

All posts in this series:

Why We Get in Debt, Part 1: Behavioral Economics and 5 Types of Apathy
Why We Get in Debt, Part 2: Lack of Self-control
Why We Get in Debt, Part 3: Cumulative Cost Neglect
Why We Get in Debt, Part 4: Procrastination
Why We Get in Debt, Part 5: Unrealistic Optimism
Why We Get in Debt, Part 6: Keeping Up with the Joneses
Why We Get in Debt, Part 7: Know Yourself and Your Limitations

Jean Marquit

Miswanting and relative position describe borrowing to finance purchases of things that do not promote welfare, but may reflect people’s competition with others for relative position. To the extent that people use credit to fund miswanted purchases, they end up incurring debts without any offsetting increase in utility.

Rationality, Revolving, and Rewards: An Analysis of Revolving Behavior on New Credit Cards

Credit cards have made our society more materialistic than it has ever been before. We like our “stuff,” and we constantly need new stuff. We look at others and feel as though we “need” or “deserve” what they have. We also feel that our relative position and status are lessened if we do not have the same material possessions as others. Miswanting occurs when we believe that some specific object or lifestyle will give us pleasure, but in reality, the item doesn’t provide any long-lasting emotional and physical benefits (Gilbert, T.D.).

When you view material possessions as a status symbol then acquiring things becomes your goal. If you try to keep up with others, especially those with more financial resources, you will go into debt. You cannot always compete with the financial resources that others have at their disposal. As a result, you will use credit cards until you are in debt.

The key is to stop comparing yourself to others. Instead, consider what you have and learn to appreciate that. Do you have a loving family? Do you get to enjoy going out once month? Find reasons to be happy with a lifestyle you can afford. Remember that things cannot replace loved ones and experiences. Miswanting usually only leads to dissatisfaction. Change your focus, and you will no longer worry about relative position. You will also put less on your credit cards.

Next: Why We Get in Debt, Part 7: Know Yourself and Your Limitations
Previous: Why We Get in Debt, Part 5: Unrealistic Optimism

All posts in this series:

Why We Get in Debt, Part 1: Behavioral Economics and 5 Types of Apathy
Why We Get in Debt, Part 2: Lack of Self-control
Why We Get in Debt, Part 3: Cumulative Cost Neglect
Why We Get in Debt, Part 4: Procrastination
Why We Get in Debt, Part 5: Unrealistic Optimism
Why We Get in Debt, Part 6: Keeping Up with the Joneses
Why We Get in Debt, Part 7: Know Yourself and Your Limitations

Jean Marquit

One of the traps that many people find themselves in when it comes to credit cards is unrealistic optimism. People fall into this trap easily when they overestimate their ability to pay off credit card bills in a timely fashion.

When one buys on credit, he or she rarely thinks that a time will come when it will be difficult to make the credit card payments.

“Most students perceived themselves as far more likely than their classmates to experience positive events such as getting a good job, drawing a good salary and owning a home, and as far less likely to experience negative events such as getting divorced, having cancer and being fired.”

The Human Connection, David G. Myers

Indeed, we think that — at some point in the future when we make more money — it will be easy to dispose of our debts. In the mean time, we buy on credit and make small, minimum payments.

Unrealistic optimism is one of the main reasons that debt starts to pile up. We keep waiting for the big break that will free us from debt or we think that we can handle the credit card payments on a large purchase. Unfortunately, most of us tend to forget that interest has to be paid. Interest changes the equation: it means that we have to pay more.

It is important to do your best to avoid unrealistic optimism when you are making purchases. Consider the original amount you will have to pay back, but factor in interest.

Also, realistically look at your budget and your credit card bill. If you cannot pay off a purchase within six months, do not buy it. Instead, save for it. It can be difficult to employ this self-discipline, but it is important. You need to be honest with yourself about your money situation to avoid getting into difficult-to-discharge credit card debt.

Next: Why We Get in Debt, Part 6: Keeping Up With the Joneses
Previous: Why We Get in Debt, Part 4: Procrastination

All posts in this series:

Why We Get in Debt, Part 1: Behavioral Economics and 5 Types of Apathy
Why We Get in Debt, Part 2: Lack of Self-control
Why We Get in Debt, Part 3: Cumulative Cost Neglect
Why We Get in Debt, Part 4: Procrastination
Why We Get in Debt, Part 5: Unrealistic Optimism
Why We Get in Debt, Part 6: Keeping Up with the Joneses
Why We Get in Debt, Part 7: Know Yourself and Your Limitations

Jean Marquit

One of the reasons many people find themselves in debt is because they procrastinate when it’s time to pay their credit card bills. Someone may not feel like making the payment when the bill comes in the mail. Instead, he sets the bill aside for later. Other responsibilities get added to the “to-do” list, and the bill gets lost in the shuffle. This type of procrastination can lead to rapidly accumulating credit card fees.

Self-control and procrastination used to be strange concepts to economists, but are now topics of growing interest by behavioral economics theorists

— Richard Thaler, Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving

When your bill comes there is a credit card grace period, usually between 10 to 20 days, before interest charges kick in. You also have a credit card bill due date. That’s the day your payment needs to be received. If you are late making your payment, you are charged late fees. Credit card companies charge between $25 to $45 (or more) for a late payment.

Once you miss the credit card grace period, get charged a late fee, are billed for interest and are assessed other fees, it’s easy to see how you accumulate your credit card debt.

This can be especially discouraging for those who have enough funds to pay off their credit card balances (or at least their purchases) each month. If fees are added to your card, it becomes more difficult to pay it off. And, because your credit card fees are added to your balance, you have to pay interest on them, too. This only compounds the problem.

It is very important to overcome the inertia, or tendency to stay in one state, associated with paying the credit card bill. If you are in a state of procrastination, it is easy to continue to procrastinate. However, you need to overcome this.

It’s best to pay your credit card bill as soon as it comes in. And the payment needs to be sent well in advance so that it arrives in advance of the due date (and before the credit card grace period ends). This way you will not be charge late fees. All credit cards, even the best student credit cards, can be dangerous if you have a tendency to procrastinate.

Next: Why We Get in Debt, Part 5: Unrealistic Optimism
Previous: Why We Get in Debt, Part 3: Cumulative Cost Neglect

All posts in this series:

Why We Get in Debt, Part 1: Behavioral Economics and 5 Types of Apathy
Why We Get in Debt, Part 2: Lack of Self-control
Why We Get in Debt, Part 3: Cumulative Cost Neglect
Why We Get in Debt, Part 4: Procrastination
Why We Get in Debt, Part 5: Unrealistic Optimism
Why We Get in Debt, Part 6: Keeping Up with the Joneses
Why We Get in Debt, Part 7: Know Yourself and Your Limitations

Jean Marquit

“Even if boundedly rational, consumers might well hesitate before borrowing $20,000 at a high rate of interest. But if a long series of much smaller purchases has that same effect, the cost might well be less visible. A distinctive form of bounded rationality stems from neglect of the aggregate effect of large numbers of relatively small borrowing choices. Call this ‘cumulative cost neglect.’”

—Cass Sunstein, Boundedly Rational Borrowing

If you had a cumulative cost neglect mind-frame, then instead of thinking of how much interest you will pay on the $5 you spent on coffee plus the $35 you spent on shoes plus the $25 you spent on dinner at a restaurant (total: $65), you think only of the individual purchase made at the time. The $5 purchase is especially insidious. You think: “It’s only $5. No big deal.” But if you spend that every weekday on your way to work, that’s $25 a week and $100 a month. Before you know it, you’ve put $1,200 on your credit card—for coffee—over the course of the year. And if you carry a balance, you are paying interest on it.

Daily purchases can add up. But if you practice cumulative cost neglect, you probably won’t notice until you are rather far into credit card debt. And this is how the companies want it. They want you to use your card for small, daily purchases, which will make you accumulate debt faster. Then you will be forced to pay the credit card companies interest. But you can beat them at their game. The key is changing the way you use your credit cards. First, only use your card for large purchases. This requires you to really think about whether you actually need or really want the item. Think about whether you will be carrying a balance and determine how much the interest is going to cost you.

Next, carry cash for small purchases. Paying in cash can force you to decide whether you really need those small indulgences. Also, you can keep the change from your cash purchases in a jar at home. At the end of every month, add up the money, roll the coins, and take it to your bank to make an extra deposit. Or you can use it to treat yourself.

The important thing is to avoid cumulative cost neglect and to consider your daily purchases. Only when you change your mindset can you avoid credit card debt.

Next: Why We Get in Debt, Part 4: Procrastination
Previous: Why We Get in Debt, Part 2: Lack of Self-control

All posts in this series:

Why We Get in Debt, Part 1: Behavioral Economics and 5 Types of Apathy
Why We Get in Debt, Part 2: Lack of Self-control
Why We Get in Debt, Part 3: Cumulative Cost Neglect
Why We Get in Debt, Part 4: Procrastination
Why We Get in Debt, Part 5: Unrealistic Optimism
Why We Get in Debt, Part 6: Keeping Up with the Joneses
Why We Get in Debt, Part 7: Know Yourself and Your Limitations

Jean Marquit

“People often make poor choices - and look back at them with bafflement! We do this because as human beings, we all are susceptible to a wide array of routine biases that can lead to an equally wide array of embarrassing blunders in education, personal finance, health care, mortgages and credit cards, happiness, and even the planet itself.”

— Cass Sunstein

Related to the idea of financial myopia is the concept of hyperbolic discounting. This is another outlook that focuses on the short-term instead of the long-term. The idea is that you can have a smaller payoff immediately, rather than holding out for a larger payoff down the road. Again, this becomes a problem because of a lack of self-control. Rather than putting off a reward until later, people tend to want something now regardless of negative long-term effects.

Buying something expensive on a credit card is a good example of hyperbolic discounting and myopia. If you buy a $2,500 TV on a credit card, and you pay only the minimum every month, you could end up paying $4,000 or more for the TV because of the interest charges every month. Rather than having the self-discipline to save the $2,500 over the course of six or seven months, you finance your purchase with debt and it takes five or six years to pay it back — with interest.

The best way to counteract the effects of hyperbolic discounting- or myopia-induced debt is to exercise self-control in your spending. Stop to think about how much something really costs if you include interest charges. Also, remember that it often takes longer to pay something off than it does to save up the money to make a purchase.

Next: Why We Get in Debt, Part 3: Cumulative Cost Neglect
Previous: Why We Get in Debt, Part 1: Behavioral Economics and 5 Types of Apathy

All posts in this series:

Why We Get in Debt, Part 1: Behavioral Economics and 5 Types of Apathy
Why We Get in Debt, Part 2: Lack of Self-control
Why We Get in Debt, Part 3: Cumulative Cost Neglect
Why We Get in Debt, Part 4: Procrastination
Why We Get in Debt, Part 5: Unrealistic Optimism
Why We Get in Debt, Part 6: Keeping Up with the Joneses
Why We Get in Debt, Part 7: Know Yourself and Your Limitations

Jean Marquit

In the back of your mind, you know that getting into debt is a bad idea. You have also realized that credit cards (whether student credit cards or not) and “creative” mortgage loans may not offer the best funding options. However, as humans, behavioral economics come into play. Just because something is rational does not mean that humans will choose to do it. Credit card use and credit card debt are prime examples of how human desires and poor choices manifest themselves in undesirable situations.

Cass Sunstein is one of the most prominent figures in behavioral economics. He, along with co-author Richard Thaler, points out in Nudge: Improving Decisions about Health, Wealth, and Happiness that people often make poor choices and are amazed by the stupidity of their decisions. This is often the case with credit cards. Credit card use is so common that it is hard to believe that the cards would be abused or used irresponsibly.

“There’s no reason to think that markets always drive people to what’s good for them.”

—Richard Thaler

Traditional economists say that all humans will choose a rational path, leading to maximum wealth, when making economic decisions. By that logic people would never drive themselves into credit card debt. Behavioral economists point out that this theory assumes that humans are rational beings, which they are not.

Poor-decision making often contributes to credit card debt in several ways. People buy more than they need or purchase items that they simply “want.” Then, they refuse or are unable to pay more than the minimum balance each month. By charging more than they have, people cannot pay off their debt. As the months go by, and they purchase more items, the outstanding balances grow.

Our money system doesn’t help either. People are allowed, and often encouraged, to spend money that they don’t have. In their short-sightedness, they fail to recognize that the bills will mount if they aren’t careful. It is this departure from rational and orderly theories of economics, which encourage people to buy only what they can afford with the money they have at any given time, that eventually leads to credit card abuse and debt.

Next: Why We Get in Debt, Part 2: Lack of Self-control

All posts in this series:

Why We Get in Debt, Part 1: Behavioral Economics and 5 Types of Apathy
Why We Get in Debt, Part 2: Lack of Self-control
Why We Get in Debt, Part 3: Cumulative Cost Neglect
Why We Get in Debt, Part 4: Procrastination
Why We Get in Debt, Part 5: Unrealistic Optimism
Why We Get in Debt, Part 6: Keeping Up with the Joneses
Why We Get in Debt, Part 7: Know Yourself and Your Limitations

Jean Marquit

What are Credit Card Rewards?

One of the latest marketing ploys in this market is credit card rewards, which are bonuses for credit card holders who spend certain amounts of money. For example, the Citi mtvU Platinum Select Visa is geared toward college students and allows holders to earn five “thank-you” points for every dollar spent at certain establishments.

Are Rewards Good for Students?

Many wonder whether reward credit cards are the right choice for students who are just starting college. Student rewards credit cards might look like advantageous deals, but in reality they can land students in real hot water. Many students will see the benefits of the rewards-concert tickets, restaurant gift cards and airplane tickets and believe that they should rack up their entire credit limit just to get the most rewards. The real cost of credit cards isn’t apparent.

What Are the Pitfalls?

It is important for students to understand the negative effects of racking up too much credit, even when enrolled in the best credit card rewards program. For one thing, you’ll be paying interest on whatever balance you cannot pay back each month, which can amount to thousands of dollars more than what you actually purchased. For another, many student rewards credit cards charge annual fees on top of the interest rates. This depends on how much you intend to spend with your card. Many of these credit cards come with expiration dates on the points you earn, so if you don’t use your points within the time limit, you lose them. Again, this encourages students to spend as much as they can in the shortest amount of time possible.

Let’s look at the Citi Bronze AAdvantage MasterCard, with which you earn one AAdvantage mile for every $2 you spend with the card. However, they impose a cap of 25,000 miles in a year, and to get that many miles, you’d have to spend $50,000 over a 12-month period. Even if you manage to spend that $50,000, 25,000 miles isn’t as much as you might think. It will probably buy you a single round-trip ticket anywhere in the United States, but you had to spend $50,000 in order to get that single ticket.

How Do You Make the Final Decision?

When making your final decision, consider both the advantages and disadvantages of student credit cards with rewards: Earning those rewards points on student credit cards might seem like a lot of fun, but in the end you could do lasting damage to your credit. Even cards that offer cash back and other bonuses will make you spend a large sum of money before you benefit from your spending.

Steve Thompson