© 2015 Shmoop University, Inc. All rights reserved.
Finance

Finance

Case Study

Sarah is in her first year of college. She has a cool new dorm room, a love of physics, and a roommate who's really into fanfiction. So far, so normal.

Sarah gets a ton of credit card offers. Because she wants to learn financial responsibility and build up her credit history, she signs up.

Smart gal.

Sarah isn't entirely clueless, so she decides to sign up for one credit card rather than take all the offers. She's already ahead of fanfic Nance, her roommate who's paying for science fiction conventions by applying to every credit card that comes her way.

Her credit card, on the surface, seems like a pretty good deal. She has a $3,000 limit, 16% interest, and no annual fee. Her parents had to cosign her application, though, so if she doesn't pay up, her parents will have to deal with collection agencies, too. The whole thing gets Sarah a long and boring lecture from her folks about financial responsibility.

Thanks, Mom and Dad. Sarah really wasn't getting enough of the lecturing in her classes.

What Could Go Wrong?

For the first few months, everything is gravy. Sarah keeps her credit card safely tucked away in the confines of her wallet, and she doesn't really think about it. No bills, no charges, nada.

But then midterms hit.

Sarah's panicking about her biology finals and all the physics labs she has to get to. Stressed out, she decides that what she really needs is to make her dorm room look nice—a little feng shui can go a long way. She's just a broke college student, though, so all she can really afford on her budget is a milk carton and the armchair with the suspicious stains on it that someone's giving away on Craigslist.

She decides she deserves the best, and, hey, that plastic is just burning a hole in her wallet. And just like that, she somehow manages to spend $3,100 at Ethan Allen.

The good news? Her dorm room now looks like something out of a magazine spread.

The bad news? Her credit card bill arrives. It's $3,100, and her interest rate is now 18% because she went over her credit limit. Not only can she charge nothing else to her bill, but her monthly payment is over $60 bucks.

Sarah cuts back on her other expenses so that she can pay that minimum. She's a college student, remember, so that $60 cuts into her entertainment budget.

Three months later, Sarah's parents pay her a visit. Turns out, the credit card company called them because Sarah's still over her limit. Even after paying the minimum, the extra fees and interest are pushing her over that $3,000.

Sarah's parents are not impressed by her decorating skills.

Turning It All Around

What now? Sarah decides to get a second job during the summer to pay more than the minimum on her card so she can graduate without debt—and with a credit rating that still lets her find a decent job and apartment.

Good call, Sarah.

She pulled her butt out of the fire and managed to avoid a ruined credit rating or a cancelled card. It could have been worse, but paying off that $3,100 is still going to sting.

Our advice? Stick to Cragislist.

People who Shmooped this also Shmooped...

Advertisement
Noodle's College Search
Noodle's College Search
Advertisement
Advertisement