Students: Beware the credit card trap on campus
Monday, August 31, 2009
by Credit Card Companies Don’t Go Into Effect Until 2010
SAN FRANCISCO, CA – Now that college students are heading back to campus for the new school year, so are the credit card companies which have just five months left to sign up young borrowers before new federal regulations restricting aggressive marketing go into effect.
Consumers Union, the nonprofit publisher of Consumer Reports, is warning students to beware of the slick marketing campaign and think twice before signing up for a credit card that could result in large and high interest debt by graduation day. To get the word out, the group has assembled a “Credit Card Care Package” with tips and other helpful information for students and their parents at www.CreditCardReform.org
“It’s open season on campus as credit card companies make one final push for the lucrative student market before new federal protections become law,” said Lauren Zeichner-Bowne, staff attorney for Consumers Union. “It might be tempting to sign up for a credit card but students should make sure they can really afford it and consider other alternatives to building up their credit record. A college education is expensive enough without piling on a mountain of credit card debt.”
Starting in February 2010, credit card companies will be prohibited from providing gifts on campus in exchange for filling out a credit card application and will be required to disclose any marketing contracts they have with colleges. Credit card companies won’t be allowed to issue credit cards to people under 21 unless the applicant has an older co-signer or can demonstrate their ability to repay card debt.
According to Sallie Mae, 84 percent of college undergraduates have at least one credit card, while more than half carry four or more. College graduates leave school with an average of $4,138 in credit card debt – a 44 percent increase since 2004. Only 17 percent of students pay off their balances each month, with the majority paying interest rates averaging 14 percent on their mounting debt.
For the average student who graduates with $4,138 in credit card debt, paying off that balance could take many years, especially if they only make the minimum payment. Students who make the minimum payment (typically 2 percent) on a $4,138 balance with a 14 percent interest rate, would end up paying $5,125.42 in interest over 280 months to pay off their bill.
To help students avoid the credit card trap on campus, Consumers Union advises:
• Don’t fall for the credit card companies’ slick marketing campaign. Credit card companies may offer everything from free college sweatshirts to iPods just to get students to sign up for a card. The banks market credit cards as indispensable and tell students that they can cancel their cards at any time. But the freebies aren’t worth it if you miss a payment and suddenly face an interest rate as high as 35 percent. You can cancel your card but you’ll still be on the hook to pay the bill with interest.
• Make sure you can really afford to borrow money with a credit card. Before you apply for a credit card, ask yourself whether you really need one and how you’re going to pay for the money you borrow when the bill comes due. In most cases, a better alternative is to set up a bank account with a debit card. Just be sure to keep an eye on your balance to make sure you have sufficient funds on hand to avoid high overdraft fees.
• If you decide to get a credit card, shop carefully and make sure you understand your contract. Not all credit cards are created equal. Look for a card with a low fixed Annual Percentage Rate (APR) and a low or no annual fee. Learn about the card’s penalty interest rate and how you can face higher interest charges if you miss a payment or are late sending in your bill. Remember that until new federal regulations go into effect next February, most credit card companies can change the terms of your contract at any time for any reason.
• Don’t be tricked by the teaser rate. Credit card issuers might offer you a low interest rate to sign up for a card but if you’re a dollar short or a day late when you pay your bill, that low teaser rate can double or triple on the money you’ve already borrowed. Starting in February 2010, credit card companies will be subject to stricter rules governing when they can raise interest rates.
• Don’t use your credit card to finance your education: Credit cards can be one of the most expensive source of funds. Avoid using your credit card to finance your tuition, room and board, fees, books, transportation, and health insurance expenses.
• Use your card wisely. Pay off your balance monthly and make your payments on time. Pay attention to your balance to avoid going over your credit limit. If you manage your credit card online, you can set up email alerts that keep you informed. Don’t take cash advances because they typically come with high interest rates.
• Don’t co-sign for your friends. Co-signing for your best friend or anybody else is a bad idea. Their mistakes can ruin your credit.
Lauren Zeichner-Bowne or Gail Hillebrand: 415-431-6747