Credit Cards Can Be a Pitfall for College Students

KNOXVILLE, Tenn. (August 24) – The car is packed, financial aid and scholarship paperwork is completed, and students are headed back to college. And while most students will finish college with a degree and promising career opportunities, many will struggle for years to repay the credit card debt they incur while in school.

The challenge for many parents is to decide whether or not their college student should apply for a credit card before new regulations go into effect in February 2010. The recently passed CARD Act will require a person less than 21 years of age to either document their ability to repay the debt, or have a co-signer before being granted credit. It will also regulate aggressive credit card marketing to college students, including enticing students to apply for cards by making offers of free t-shirts, beach balls, or even chances for an iPod.

In addition, the Credit Card Act of 2009 requires that banks mail bills at least 21 days before their due dates and provide at least 45 days' notice before making a significant change to their rates or fees. The new rules also bar banks from increasing rates and fees without warning when a consumer misses a payment or exceeds a credit limit.

A Consumer Credit Counseling Service of Greater Atlanta survey this summer determined its clients 21 and under who have taken college courses or other higher education are carrying significant credit card debts. The survey found college students who came to the agency for bankruptcy counseling had an average of $21,637 in credit card debt and students who came to the agency for budget counseling had an average of $7,056 in credit card debt.

“College is when many students start managing their finances for the first time,” said Daru Burdge, president of Consumer Credit Counseling Service (CCCS) of East Tennessee. “The implications of using credit wisely while in college are far reaching—and can impact your employment status, your ability to secure a loan for a car or home, and even the rates you pay for insurance and future credit.”

When it comes to building a positive credit record, CCCS suggests that families consider the following when deciding what would be best for their situation:

• Have the student become an authorized user on the parent’s card. Commonly known as piggybacking, the student is attached to the parent’s card and has charging privileges, but no legal responsibility for payment since the card is not in his or her name. The activity on the account is reported to the credit bureau in both the parent’s name and the student’s name, thus the young adult builds a credit file of their own. This option allows the parents to monitor the student’s spending, and remove them from the card if things get out of hand.

• Get a secured credit card. This type of credit card requires a cash collateral deposit which then becomes your line of credit, thus limiting any abuse. Consumers need to be very careful when applying for this type of card, as some charge high fees which can greatly diminish your spending power. You can also expect a secured card to have an annual fee and a higher interest rate than an unsecured card. Make sure that the issuer reports to the credit bureau. If they do, and if you pay responsibly, a secured card can not only be a safe way to build a credit file, but after a year or so will likely qualify you for an unsecured card.

• Obtain a card in the student’s name. Since the clock is ticking on the availability of this option, it definitely merits a conversation between the student and the parent. If the young adult has some financial training and experience with credit, and has demonstrated that he or she can handle it responsibly, then having a card in their own name could be a good way to launch their own credit file. Student credit cards typically have low credit lines, thus somewhat limiting the amount of financial damage that can be done. However, an irregular payment history on even a small debt can damage a credit file, which defeats the purpose of having a card.

When you send your student off to college, help them avoid these common credit card pitfalls:

• Be wary of unsolicited credit card offers. Low or zero introductory rates, no annual fees, rewards programs and free cash advances can be appealing, especially for students living on a fixed budget. Most offers are short-lived and will cost more in the long run.

• Know the costs of credit. According to The Credit Card Monitor, average interest rate for student credit cards is 15.33 percent. A student leaving college with a $5,000 balance who makes minimum payments of just 4 percent will pay more than $2,300 in interest and take 50 years to pay off the balance. Annual fees, cash advance and balance transfer fees, and late fees will only add to the problem.

• Use credit wisely, and sparingly. Make your payments on time and spend only what you can afford to pay off at the end of the month. Avoid impulse purchases.

• Know the danger signs. Going from being financially responsible to being in financial trouble can happen quickly. Warning signs include using one card to pay another, using student loan funds to pay credit card balances, missing or making less that minimum payments, or reducing course load to work more hours to cover rising debt.

Families can help prepare their college students by discussing their credit options, helping them make the right choices, and guiding them in their financial decisions. Need help getting started? CCCS provides confidential budget counseling, money management education, debt management programs and other services to help consumers. Contact CCCS at 800-251-CCCS or online at www.cccsinc.org.