I had a conversation with a friend the other day, and I’m not exactly sure where I stand on my finances now, because of it. So, I’d like to take a moment to post that conversation (well, more of a dramatization of the conversation, since my memory isn’t quite word-for-word) and ask you guys what you think.

(Written in pseudo-script format because, hey, I paid for those script-writing classes, didn’t I?)

Interior, Classroom, Day

STEPHANIE, a gorgeous, intelligent, awesome, amazing college student [hey, it’s my script, I can describe myself however I want] enters the room and sits next to FRIEND, who is completely ambiguous in every way. Stephanie take out her laptop and spends a solid two minutes fiddling with the power cord.

FRIEND: “Uh… Steph? What are you doing?”

STEPH: “My power adapter is… wonky. Broken-like. I’ve gotta wiggle it to make it work.” [Yeah, I really talk like that, in an informal setting]

FRIEND: “Time to buy a new one, maybe?”

STEPH: “Yeah… probably… if I had the money. But I don’t, and wiggling makes it work. Eventually.”

Stephanie’s eyes light up as the indicator light on her laptop lets her know that it is finally receiving power from the cord.

STEPH: “See? Still works!”

FRIEND: “Uh… yeah. Ok. But you should probably get a new adapter, anyway. Don’t you get paid this week?”

STEPH: “True! Except that money is for my insurance. And gas for my car. And, of course, my credit card bill. I’m paying lots and lots to my credit card bill to try and pay it off before November.” [Insert boring explanation of my switch to a 0% APR credit card here]

FRIEND: (waking up from the nap taken while I droned on about credit cards) “That’s great and all, but, won’t you be making more money during the summer? Theoretically? I mean, shouldn’t you pay a little less to your credit card now, buy some stuff you need, and then ramp up your credit card payments in the summer?”

STEPH: “Ok, yes, theoretically, I should be making more this summer, in whatever job I get. But I don’t have that job yet, and I don’t like the idea of relying on ‘future dollars,’ since that’s what got me into this credit card debt in the first place.”

FRIEND: “Yeah, ok, I understand that, but you’re being pretty cheap.”

STEPH: “I think you mean frugal.”

FRIEND: “Nope. Cheap.”

STEPH: “Frugal!”

FRIEND: “CHEAP!”

STEPH: “FRUGAL!”

Stephanie and her friend growl at each other and then suddenly appear in the American Gladiators arena, ready to fight. [That totally happened, I swear.]

So, back to you, readers. Am I being cheap? A power adapter for my laptop isn’t the only item on my list of “Things I Really Ought To Buy” – a year of compacting has left me with a laundry list of purchases that I probably should be making.

I’m still not sure I want to drop down my credit card payments at all, but if I did, it wouldn’t be “drop down to just the minimum payment” or anything. I’m paying $160 a month to my credit card on my current plan, and if I did drop it down, it certainly wouldn’t be to anything less than $100 (for reference, my minimum payment is $17).

So… thoughts?

A few months ago, I managed to get my hands on a new credit card with a 0% introductory rate for 12 months. I transferred the balance from my other credit card, which means that if I can manage to pay it off before the intro period ends, I won’t have to pay a cent more in interest, beyond what I’ve already wracked up.

It’s a bit easier said than done, perhaps.

Just yesterday, I have to plunk an additional $350 on that credit card in order to pay for needed repairs on my car. I would have paid for it in cash, if I could have – I’m not happy with the idea of putting anything on my card, even if it is at 0% interest.

The key to a 0% APR balance transfer is to make a commitment to pay it off before the intro period ends. For me, this means paying more than three times the amount I’ve been paying monthly to the card. It’s going to be tight. It’s going to be painful. But it’s exactly what I need to do to pay off the card.

The other good thing about transferring my balance is that it leaves the original card free and clear, so that I can begin to use it responsibly again. There was a time (circa early 2006) when I only put small purchases on that card, and paid it off every month – never carrying a balance. Now I have a chance to get back to that, and enjoy the float and rewards points that using the card can offer me.

After I’m done paying off my credit card balance, it will be on to the next thing that’s bothering me: paying off the interest on my student loans!

Hi Stephanie,
I love your website and it’s really helped me take initiative of my spending and savings habits. I’m 20 and I have pretty awful credit. I finally got my credit score and it’s 520. I have two credit cards that will be paid off no later than December and I have a few things on my report that I’m disputing?
What can I do now to drastically improve my credit? I now have a job and once everything is paid off I just want to make a big change so I can be on the path to having good credit. Any suggestions?
Thanks,
Corey

Corey, this probably isn’t what you want to hear, but what you’re doing right now is exactly right, and there isn’t a whole lot more you can do. Improving credit is, unfortunately, a rather slow process. But you are on the right path, so don’t lose hope!

Let’s take a quick look at the five elements that make up a credit score, just to see if there’s anything else you might do. From the Wikipedia entry on credit scores:

• 35% – punctuality of payment in the past (only includes payments later than 30 days past due)
• 30% – the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits)
• 15% – length of credit history
• 10% – types of credit used (installment, revolving, consumer finance)
• 10% – recent search for credit and/or amount of credit obtained recently

Punctuality of Payment
This is the largest chunk of your score, so it’s very important. This includes more than just payments on lines of credit – any bill that’s more than 30 days past due can show up here. Be sure to stay on top of your utilities, cell phone, car payments, credit cards… all of it! If you have to pay something late, make sure you don’t let it get to 30 days past due.

Ratio of Debt to Credit
As the second biggest chunk, this is more important than most people think. Once you’ve paid off your credit cards, you’ll probably want to start using them again (without carrying a balance). This will help you establish a series of on-time payments, which is good for the “Punctuality of Payment” chunk above. However, you don’t want to charge too much, or else you’ll throw off this chunk.

Even though you’re going to pay your cards off every month, try not to charge more than 30% of your total credit limit – across all of your cards. Remember that last bit – it’s the total debt on all of your cards out of the total credit limit of all your cards!

Length of Credit History
There’s nothing you can do to boost this, and it’s probably not one of your strong points, since you’re only 20 years old. Thankfully, it’s only 15% of your score, so don’t fret over it. However, there are one thing you can do to make sure you don’t hurt it – that is, don’t cancel your oldest card, if you can help it. Unless it’s an awful card with lots of ridiculous fees just for having it, keep it around for as long as you can.

Types of Credit Used
At only 10%, this isn’t hugely important. You’ll probably eventually end up with a car loan and a mortgage to balance this out, but for now, it’s more important to focus on other aspects.

Recent Credit Inquiries
Yep – just asking for credit hurts you. But not much, and not for long. There isn’t a whole lot you can do here either, except for simply not filling out every credit card application that comes in your mailbox! 😉

You’re doing good by paying off your cards and making a commitment to improve your score. Just focus on keeping your debt-to-credit ratio low and making payments on time, and you’ll see drastic improvement.

Jonathan over at My Money Blog did a post about the Best Credit Card for College Students. This isn’t the first time I’ve seen this, since it’s based on a CNN Money article. In fact, not only have I seen this information – I went ahead and applied for the recommended card back in early September.

The card in question, the mtvU Platinum Select Visa Card for College Students by Citibank, does seem like the ultimate credit card for college students. An intro 0% APR for balance transfers and purchases (which I was going to take advantage of), 5% back on restaurants, bookstores, record stores, movie theaters and video rental stores. And “bookstores” includes Amazon.com, where you can buy anything you could ever possibly want – and get 5% back.

Not only that, but the card also gives you Thank You Points for getting good grades! A 4.0 could get you a $20 gift card at one of the many, many stores included in the Thank You Network.

Sounds awesome, right? I wish I could give a glowing review of this card, but alas, I cannot. Because instead of actually getting the card, I ended up in application hell.

It started out pretty much daisies and roses. The online application process was exceedingly simple, and didn’t even ask for my household income! (That probably should have tipped me off that this was not actually going to go smoothly.) So I sent the application into cyberspace, and waited.

And waited. And waited. Finally, after about 3-4 weeks, I got a letter from Citibank. There was no indication as to whether I was approved or denied – it just said that they needed more information to verify my enrollment as a student. “Fine,” I thought, “That’s fair, since it’s a student card and all.” Except the “verification” was just the beginning of application hell.

In order to verify that I was a student, they wanted the following:

• A copy of my student ID, front and back, with a current enrollment sticker OR
• A copy of a paid tuition bill for the current semester
• AND a copy of a bill (from the last 90 days) for a land line phone (cannot be cell phone)
• and if the land line phone bill was not under my name, they would ALSO need a copy of one of my bank statements from the last 90 days.

Ugh. This was already starting to get annoying. First of all, my school doesn’t DO “current enrollment stickers” on our IDs, so it was going to have to be a copy of the tuition bill.

Secondly, I can count on one hand the number of college students I know who even have a land line. Luckily, I happen to be one of those – but only because I moved home to live with my parents this year. But, of the college students I know with land line phones – none of them have the bill in their name. Some of them don’t even get a bill, because their phone service is wrapped up in the school’s housing bill.

So, fine. I mailed in the obnoxious amount of paperwork to verify my “studentness,” and waited.

And waited. And waited. About two weeks later, I got a phone call from Citibank, just telling me to call them back (this was an answering machine message). Confused, I called the number, and the lady on the other end of the phone didn’t know why I was calling, either. Since the answering machine message hadn’t given me a reference number, I had to give the customer service agent my social security number in order for her to look up the account.

That’s a major loss of points guys – there are few things I hate as much as giving out my social security number, especially on the phone.

So the lady, who was very nice, actually, looked up my account and said that I needed to resend my tuition bill, because it was printed from a website, but didn’t contain an “http.” This was actually my fault – I don’t have a printer on my computer, so I’d saved the bill page and then took it to another computer to print. So I accepted my responsibility, and asked her was address I should send a properly-printed tuition bill to. (Note this now: nothing else was said about there being any other problems with the paperwork I had sent in.)

So I sent a new tuition bill in, and waited. But this time, I didn’t wait long! Two days later, before they could have possibly received the second tuition bill, I got an email from Citibank. An email saying “You have been denied because we could not verify your student enrollment.”

What?!?

I waited a couple days, to make sure the new tuition bill had time to get to them. And then I called again. This time I had a reference number, but because I couldn’t understand the customer service rep very well because of her accent, I ended up screwing up my “password” and then having to give her my social security number anyway.

It’s like nails on a chalkboard when I have to give out my social security number on the phone.

So she pulled up my account info, and said that there was a problem with my tuition bill. The problem this time was that it didn’t contain my social security number. “Well of course it doesn’t have my social security number on it! My school switched to not using our social security numbers because it’s a security risk!” I said. (Also, couldn’t they have mentioned this the first time I called?)

The women informed me that I would have to send in a copy of my student ID with a current enrollment sticker. I told her my school doesn’t do current enrollment stickers. She told me I would have to get the school to send a fax, on school letter head, with my reference number, my home address, and my social security number to Citibank.

And that’s where I gave up. I have no interest in going down to the Registrar’s office, and giving them all of my information, asking them to type it up and then fax it to Citibank. Nope – not worth my time.

The long and short of it is, if two or more of the following are true for you, don’t apply for the mtvU Platinum Select Visa Card for College Students:

• Your school doesn’t put “current enrollment stickers” on your ID.
• You tuition bill doesn’t have your social security number plastered on it.
• You don’t have a land line phone in your name.
• You don’t like giving out your social security number as if it were candy.

I can’t believe I let them pull my credit report for this. So lame!

“You spend 15% more when you use a credit or debit card instead of cash.” Have you ever seen this statistic before? Chances are, you have. But here’s a question for you – have you ever seen the study this statistic comes from?

Lots of people quote this statistic, without citing a source. This isn’t limited to small fries in personal finance blogging – the Wall Street Journal has an article titled As Cash Fades, America Becomes a Plastic Nation which says: “When people pay with plastic, they tend to spend more — often more than they have in the bank,” without offering anything to back up that claim. Dave Ramsey also threw the statistic around in his article The Truth About Credit Card Debt – also without citation.

So where did this statistic come from, and is it even true? I started in on an epic quest to try and find some answers.

My Epic Quest (For Answers!)

I had a lot of trouble tracking down whatever study this may be – at least, any study that I could get access to without paying for. And what good is a study that I can’t link to, and let you guys look at yourself?

I did find a few studies that may have the answers. Such as Always Leave Home Without It: A Further Investigation of the Credit-Card Effect on Willingness to Pay. This study looks like exactly what I was looking for, but I couldn’t access it without whipping out my own credit card. However, the abstract for the article was very helpful:

In studies involving genuine transactions of potentially high value we show that willingness-to-pay can be increased when customers are instructed to use a credit card rather than cash. The effect may be large (up to 100%) and it appears unlikely that it arises due solely to liquidity constraints.

In other words, this study shows that people do tend to spend more on credit cards, and it is unlikely that this is just because credit cards offer access to more money.

Still, I was not satisfied; I wanted a study that I could actually read through myself. Luckily, I found The Realities of Spending (PDF), a British study that I could actually access and read. This study examines the psychological reasons why a person might spend more using a credit card.

Some things to be gleaned from The Realities of Spending:

~ Adding a $30 expense too a $637 credit card bill makes the $30 expense seem smaller. Grouping transactions on a credit card bill makes the size of individual expenditures seem smaller, which increases spending.

~ Thinking about the cost of a purchase while consuming or using it can lower the pleasure gained from the purchase. Credit cards block this by disassociating the payment from the consumption – in other words, you don’t feel the pain of paying for something while using it if you use your credit card.

~ This works the other way as well: the pain of paying can be cushioned by thinking about the benefits of the purchase. This is why it’s easier to put “things” on our credit cards instead of “experiences” – while we’re paying off our credit card, we can think of all the enjoyment we’re still getting from our iPods, HD TVs, and that cute little robot vacuum cleaner.

~ Credit cards provide the most “decoupling” of payment and transaction out of all the payment methods. In other words, you buy now and pay later, and so act of buying and paying become “decoupled” in your mind. Credit cards do this in a number of ways:

• The increased period of time between when you make the purchase and when you pay the bill.
• Grouping many different transactions into one bill.
• A great diversity in the types of transactions can also reduce coupling – so if you buy gadgets, food, gas, and a range of other things on your card, it will reduce coupling for all those purchases.
• You don’t see actual money leaving your hand, you just write your signature on a piece of paper or on a little screen.
• People generally have a low recall of what they’ve paid for with their credit card. I know I do – I had to comb through my old statements and make a crazy spreadsheet in order to remember all of the purchases I made with my credit card.

So, Do We Spend More, or Not?

I’ll give you my usual answer: absolutely maybe. It really differs from person to person, especially when we’re talking about whether those psychological effects will occur with a debit card, instead of a credit card.

For example, I find that I tend to spend more with cash. Seriously! Here’s why: almost everything “serious” (bills) that I have to pay for comes out of my checking account, usually through online bill pay or a check. Therefore, in my brain, any money I have in cash can’t be used for “serious” things. It’s “fun money!” because it’s in cash form.

Of course, in the back of my mind, I know that I could easily put that cash into my checking account and turn it into “serious money.” But the part of my brain that makes impulse purchases doesn’t really listen to that other part of my brain.

I’m not the only one like this. Trent of The Simple Dollar has a problem with cash burning a hole in his pocket, as well.

So What Now?

You’ve got to figure out what type of person you are. You might already have an idea of whether you spend more on cash or plastic in your head. Think about how it feels when you pay for something with cash, debit card, and credit card.

But you’ll also probably want to track your spending. I’m a big proponent of doing this anyway – so in addition to writing down what you buy and how much you pay for it, jot down what form of payment you used. Once you’ve got enough data, you’ll figure out what kind of person you are. Then you can figure out which form you can best use to curb impulse spending.