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Credit Cards Could Trap College Kids

Millions of young men and women are just starting a new year at college and, along with their schedules and dorm assignments, they're getting credit card applications. Plenty of them. That, says resident Early Show financial adviser Ray Martin, can be very dangerous to their financial health down the line. So, Martin has an important lesson about handling credit responsibly, for students and their parents, alike.

Credit Cards on Campus

During the next several weeks, 17 million college students will arrive at college campuses across the nation. Many will be targeted by credit card marketing campaigns designed to sign them up for specific cards endorsed by their college. Many students will accept these offers and fall into what is known as "the college credit card trap."

According to a national survey on the use of credit cards by college students conducted by the Nellie Mae Corporation, a leading provider of federal and private education loans, about 42 percent of college freshman have a credit card. But by the time they reach their final year of college, 91 percent of students have at least one credit card and the average number of credit cards owned is four per student. Forty-six percent of students reported that they obtained their first credit card in their freshman year. By the time students reach their senior year, they carry an average credit card balance of about $2,850. College students report direct mail solicitation as the primary source for selecting and signing up for a credit card.

Students' Credit Cards

It's reported that nearly every major college and university has a lucrative affinity relationship deal with a credit card company. These deals can pay millions of dollars, providing a source of steady income to the college in exchange for handing over valuable marketing rights to the credit card company. In most cases, the deals work like this: The credit card company pays a multi-million dollar royalty fee to the college in exchange for access to mailing lists of the students, faculty and alumni, and exclusive marketing privileges at athletic and other school events. In addition, the school is paid a fee for each student who signs up for a credit card, as well as a percentage of the amounts they charge on the card.

So it seems that as college students are signing up for credit cards and getting into debt, their schools are profiting from it. If this strikes you as a conflict of interest and just flat-out wrong, you are not alone. Urged by a chorus of consumer advocates, Congress plans to hold hearings on these practices later this year, to more closely examine the relationships between credit card companies and colleges and universities. Perhaps more colleges will use some of the revenue from these credit card deals to fund financial and debt management courses and require their college students to complete these courses before obtaining their credit cards!

So, what's the message here? Should college students avoid credit cards altogether? That's just not practical. But many students obtain a credit card without giving any thought to setting up a financial plan with limits on the total amount of debt they should get into. As a result, they often find themselves in an unmanageable situation, facing an unmanageable amount of debt after graduating from college.

The learning curve with credit cards is not difficult, but there is little room for trial and error, as making a mistake can have big consequences. Students need to learn to establish and use credit properly, and to develop a good credit history, before they graduate from college. Often, the first step in this process is getting and responsibly using a credit card, which is an important and valuable financial tool, when used correctly. But this can backfire, since having too many credit cards and late payments can ruin your credit rating. This can have long-term consequences, such as getting turned down for a car or home loan or, even worse, a job -- many employers check credit reports and turn down applicants who have poor credit ratings.

Using Credit Cards Correctly in College

Every student who gets a credit card needs to understand this most basic and essential concept: Each time you use a credit card, you are borrowing money. The credit card company will charge you interest until you pay it back in full. Credit cards never give you more money to spend, they just delay when you have to pay, and can even significantly increase the cost of what you buy when it is charged on your credit card and interest begins to add up.

Do's and Don'ts for Students Using Credit Cards in College:

  • Do Shop Around for the Best Cards: Many of the credit cards offered on college campuses are not always the best deals for students. The best credit cards to get have three key features: no annual fees, a reasonable interest rate (18 percent or lower), and online account management. If the credit card offered through the college's affinity program does not have these features, students should check out Bankrate.com, lowcards.com, and creditcards.com, for lists of the credit cards available to students.
  • Do Make Payments on Time: Don't mistakenly think it's better to skip a few payments so you can save up to then pay off your card's balance in full. To avoid having a late payment posted to your credit report, you must make at least the minimum payment each month, and it must be made on time. Students who make one or two late payments can see their credit scores plunge more quickly because their credit history is so short. Making late payments can also trigger universal default provisions, where credit card companies raise the interest rates on all of your cards, even if you make a late payment on only one card.
  • Do Pay More than the Minimum: There are two ways to pay off your balance on a credit card. Paying in full allows you to avoid interest charges on purchases, and paying over time will mean that you will carry a balance and will pay interest charges until your balance is paid in full. On a credit statement, there is a minimum payment that is the absolute minimum that you can pay without incurring a late payment fee and to keep your account current. The minimum payment amount typically includes all of the monthly interest and a small percentage of the balance due. At a very minimum, you should always pay two to three times the minimum payment to pay off your balance faster and to save money.
  • Don't Use For Cash Advances: Credit cards can be used for cash advances, but you should do so as a very last resort -- for example, you need an emergency car repair and the repair shop only takes cash. Using a credit card for cash advances will trigger additional cash advance fees. The typical cash advance fee is four percent of the cash advance amount. Also, the amount of your card's balance that results from cash advances carries a higher interest rate than the rest of your balance.

    Another popular form of using a credit card to get cash is to charge the expenses for a group of friends and have your friends pay their portion of the costs in cash to you. The idea is that you will hold onto the cash and use it to pay for the items charged to your card. The problem is that cash they give you never finds its way to your credit card, because you quickly spend it. Now you are stuck with no cash and a large credit card balance, with additional interest charges.

  • Don't Use for Tuition: About one-in-four college students report charging a portion of their tuition to their credit cards. This is clearly not a smart move, as credit cards come with higher interest rates and terms that are not as favorable as other education loan options. Students who need to borrow to pay for qualified tuition costs should instead use education loans, which come with lower interest rates, built-in deferment of payments, and money-saving consolidation programs to use to pay off these loans after graduation.

    Finally, parents need to understand that students can apply for credit cards without any parental permission. Parents who want to supervise students' use of credit cards should never sign up as a joint owner with their student on a credit card: This is an invitation to credit problems and identity theft for both the parent and the student if a student's credit card is lost or stolen. Parents who want to monitor students' use of credit cards can get set up to receive duplicate statements or set up online access to view the account activity.

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