Higher Education Issues Consumer [ Student | Consumer | Student Consumer ]

Avoid the Campus Credit Card Trap

A PIRG Fact Sheet for College Students

Thinking about filling out one of those easy credit card applications at a campus table this week? Before you do it read this. A free Frisbee, T-shirt, freebie or bottle of soda isn't worth 7 years of bad credit, is it?

A good credit record is a critical part of getting ahead. Having good credit will help you obtain car loans and home mortgages and even employment, since many employers now check credit reports as part of their employment decisions.

HOW TO BUILD YOUR CREDIT REPORT: A regular record of on-time bill payments to a national creditor can build your credit report. If you have a national credit card (Mastercard, Visa, Discover, Optima) (it canât be co-signed, it must be in your own name) your regular monthly payments are reported to the credit bureau, even if you're smart enough to never carry an unpaid balance.

HOW TO WRECK YOUR CREDIT REPORT: Pay your credit cards late, or worse, don't pay them at all. Late payments or account charge-offs or bankruptcies stay on your credit report for 7 years or more, wrecking your chances of obtaining more credit down the line.

COLLEGE STUDENTS ARE SPECIAL TO THE CREDIT CARD COMPANIES: Believe it or not, credit card companies want your business so badly they're offering much more than trinkets and soda. While youâre a student, they'll let you apply for credit cards without jobs or income! You can apply for credit cards even with a blank credit reports, even without getting a loan co-signer.

No other consumers can get cards this way, only college students. (For example, recent graduates who donât have jobs yet and messed up their credit reports by not paying their bills while they were in college have very little chance of getting a new card, unless they get a co-signer or secure the card with a deposit.). So if you take advantage of their limited special offer, be smart!

WHAT IS A CREDIT CARD?

A credit card is an open-ended loan card that allows you to borrow money up to a certain credit limit and carry over an unpaid balance, with no fixed time to re-pay, as long as you make the minimum payment due, usually 2-3% of the outstanding balance, each month.

WHAT'S GOOD ABOUT CREDIT CARDS?

Credit cards are convenient when you don't have cash. Credit cards are great for emergencies. National credit cards help you build a credit report. Some local department store and gas cards may not.

WHAT ARE DEBIT CARDS AND CHARGE CARDS, THEN?

Banks now offer many customers enhanced ATM cards, called ãVisa Checkä or ãMastermoneyä debit cards. They look and act a lot like credit cards. These ATM "debit" cards, however, simply allow you to take your own money out of your checking or savings account. You can use them without a secret PIN code, either over the phone or at most merchants that accept credit cards. (Although not always, since some purchases, such as a car rental, still require a credit card.) IMPORTANT: Because an ATM debit card can be used like a credit card, without a secret PIN code, be very careful you don't lose it, and always check your bank balance anyway. You could lose all the money in your checking account to a fraudster who uses your card or simply copies your account information off a mislaid receipt. It may be difficult to get all your money back from the bank if you don't follow the rules.

A charge card, like an American Express card, offers credit card convenience, too, but you must pay off your charges each month -- you usually cannot carry over a balance.

HYPOTHETICAL REAL-LIFE SITUATION: You get to school in September and buy $500 worth of books and school supplies with your credit card. You then spend $500 (it adds up fast when it's on a card) on dorm furnishings, an emergency car repair, and a weekend visit to your friend's college.

-- IF YOUR INTEREST RATE IS 18% APR, HOW LONG WILL IT TAKE YOU TO PAY OFF THAT $1,000 BALANCE IF YOU MAKE ONLY THE MINIMUM MONTHLY PAYMENT OF 3% AND THEN STOP USING THE CARD?

Better pay more than the minimum! Better pay as much as you can afford!

QUESTIONS TO ASK YOURSELF BEFORE APPLYING FOR A CREDIT CARD

(1) Ask, do I need it?
(2) Next, can I afford it?
(3) Am I good enough with personal finances to at least pay off the minimum every month?
(4) Even better, will I pay off the full balance every month?

DECIDED TO GET THAT CARD?

(1) SHOP AROUND. Beware of sleazy "teaser rate deals" that jump way way up after 3 months. Look for the best offer around. Remember, the interest rate (APR) doesn't matter if you always pay off the full balance. But if you carry an unpaid balance, it matters a lot more than the annual fee.

(2) ONE CARD: One national credit card is all you need to help you build a credit record, if you pay it off on time. Remember, you can build a credit record without carrying an unpaid balance. Don't get into the card shuffling habit, use just one card.

(3) PAY OFF THE FULL BALANCE: If you must carry a balance, always pay as much as you can afford, every month. Never pay only the minimum balance, or you'll never pay down the card. (Hint: See hypothetical real-life situation above.)

(4) PAY ON TIME: Mail checks early. Late credit card payments hurt you 3 ways: (1) You know about the bad credit reports. (2) Banks also charge late fees of about $20-25 bucks. (3) Finally, 1-2 late payments in a year can put you in the penalty box-- your interest rate could jump to a penalty rate of 24% or more.

(5) KEEP A LOW LIMIT: If you make timely payments, your bank will automatically raise your credit limit without asking you and other banks will send you offers for more "pre-approved" cards. Don't take the bait. Decline the increases! Keep your balances low! Donât max out your card! Throw away the offers!

(6) AVOID CASH ADVANCES: Don't use your credit card like an ATM card for cash withdrawals-- the interest rate on advances is at least 2% higher than on purchases and interest accrues immediately.

(7) NEED MORE HELP? Check out PIRG (http://www.pirg.org> or the Federal Trade Commission or the Federal Reserve Boardon the web for unbiased consumer education materials. [Call your folks if you think you're falling into the credit card trap, before you get in too deep.] Check with your college financial aid office for other helpful credit and debt advice. In deep? Consider non-profit Consumer Credit Counseling or the Debt Counselors of America. And, itâs ok to call your bank when you think a payment might be late, or if you have a question. They may not always be sympathetic, but they donât like surprises.


webmaster@pirg.org