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September 13, 2004
Students run up
high credit bills
College students and credit cards:
A dangerous
combination
Luisa Pawlak
Mesa Legend
For a myriad of college students, the bombardment of credit card offers has become a certainty. Most will pose relatively high interest rates, however, they’re fairly effortless to attain and there are few income requirements to account for. When used responsibly, credit cards can assist students in establishing reputable credit histories. According to Gerri Detweiler, an education Adviser for Debt Counselors of America, “The best reference you’ll find on a credit report is a major credit card paid on time, all the time.”
Unfortunately, credit cards are notorious for producing major financial scars that don’t fade easily. In fact, many find themselves haunted by a past in which frivolous spending appeared harmless and the inevitable repercussions were “out of sight” and therefore “out of mind.” Numerous experts believe students are coerced into a false sense of security in terms of the benefits, but in turn are forced to learn about the lofty cost of credit cards the hard way: after they run up balances. “Learning as you go along is expensive,” warned Steve Bucci, president of Consumer Credit Counseling Service of Rhode Island.
Fact is, high rates accompany most student card offers. In the Bankrate.com (tm) survey of lenders that offer student credit cards, the average rate stood out at a whopping 17.51 percent, about a half a percentage point higher than the average for all variable-rate credit cards. Among the student-card issuers, those offered by credit unions tended to have the most consumer-favorable terms, led by the 12.5 percent fixed-rate Visa card offered by Navy Federal Credit Union. Six out of the seven credit unions surveyed offer student cards with APRs less than 15 percent, and all had lower late fees than their commercial counterparts.
Individuals pursuing credit cards should review teaser rates, those unbelievably low introductory rates that last approximately six months, with great caution. It’s gravely important to know what the APR will be after the introductory period. One late payment, combined with the rate, whether it’s during an introductory period or not, can oftentimes elevate costs up to 20 percent or more and will result in a sizable late fee. “All cards are not the same,” stated Dara Duguay, executive director of the Jumpstart Coalition for Personal Financial Literacy. “You need to shop around.”
Today, students have a bountiful array of credit cards to choose from. “As long as you’re a full-time student, you can get a card,” Detweiler said. Credit card issuers are fully aware that parents can usually be counted on to bail their kids out should they run up oversize balances or fall behind in payments. “I’ve talked to parents who were totally shocked at the amount of the credit card bill,” Duguay said. “I’ve heard everything from $500 to several thousands of dollars.
Maintaining balances as low as possible is the key to credit survival. A credit limit of $1,000 is more than enough for most students. “We have a rule of thumb for kids who say they need a card for emergencies,” Bucci said. “If you can eat it, drink it or wear it, then it isn’t an emergency. We also caution kids: If a lender gives you cards with $1,000 or $2,000 limits, that doesn’t mean you can afford to carry a $1,000 or $2,000 balance.” Detweiler of Debt Counselors said that, by sticking to minimum payments, it would take a person more than 12 years and $1,115 in interest to pay off a $1,000 bill on a card with an 18 percent annual rate.
Even worse, falling behind on credit card payments severely injures credit ratings and can hinder one from buying a car, house or even renting an apartment. “The credit report folks are there and they are watching, and it will be on your report for seven years.” Bucci added.
For some, that ugly “disapproved” statement might be their only wake-up call.
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