Think you know the ins and outs of credit cards? Take this quiz, recently administered to more than 800 college students.
1.Assuming the following individuals have the same credit card with the same interest rate, who will pay the most interest on their purchases over time?
a. Joe, who makes the minimum payment on his credit card bill every month?
b. Jane, who pay the balance on her credit card in full every month?
c.. Joyce, who sometimes pays the minimum, sometimes less than the minimum, and missed one payment on her credit card bill?
d. All of them will pay the same amount.
2. Imagine there are two options when it comes to paying back a loan and both come with the same interest rate. Which option would you select to minimize your total costs over the life of the loan?
a. Option 1 allows you to take 10 years to pay back the loan.
b. Option 2 allows you to take 20 years to pay back the loan.
c. Both options have the same out-of-pocket cost over the life of the loan.
3. Suppose you had $100 in a savings account, earning 2 percent per year. After five years, how much would you have in the account, if you left the money in to grow?
a. More than $102.
b. Exactly $102.
c. Less than $102.
d. Not sure.
The answers: 1.c; 2. a; 3. a.
By and large, the college students around the country who took this quiz last December graded poorly — fewer than half knew the answer to question 1, about 60 percent correctly answered question 2, while 75 percent nailed question 3.
I’d wager that many adults didn’t move to the head of the class either.
Sallie Mae, the student loan and financial services company, administered this quiz to gauge college students’ understanding of credit. It was part of a study, released this month, by Sallie Mae and the Ipsos research firm on how college students manage their finances.
While most of the surveyed students use debit cards to pay for their purchases, more than half also carry credit cards. And the good news is that they seem to be using credit responsibly.
For example, more than 60 percent of the students pay their credit card balance in full every month, nearly 70 percent keep their average monthly credit card balance under $500, and 73 percent pay their bill with their own money rather than relying on their parents.
But here’s the kicker: The report noted that these positive financial behaviors “mask an underlying gap in college students’ knowledge about the detailed workings of credit.”
That shortcoming could come back to bite them someday.
What accounts for the gap? The research report doesn’t really address why it exists, but “I think it’s safe to say that more education and a deeper understanding of how credit works would be helpful,” said Rick Castellano, a Sallie Mae spokesman.
To be sure, a required high school or college personal finance course would help, and the survey noted that the vast majority of students are eager to learn.
But parents have a role too, especially since the survey pointed out that students lean heavily on their elders for money management advice.
It’s not enough to simply hand over plastic to your 20-year-old. You should also go over the fine print, especially penalties, fees, and the chart on the monthly billing statement that shows how much interest will be owed by just paying the minimum each month.
Two other rules of thumb that may correct some flawed thinking: Don’t use a credit card to pay for food, drink or anything else that will be consumed before the monthly statement arrives. And secondly, don’t consider the spending limit on your credit card to be an extension of your income.
For more credit tips, check out the “Guide to Understanding Credit,” produced jointly by Sallie Mae and FICO credit scoring organization.
Steve Rosen: 816-234-4879