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Consumer Advisory Bulletin

Special to Colleges and Universities - Fall 2000

Credit Cards on Student Incomes: Proceed With Caution - and Shop With Care!

Students are flooded with credit card offers, often with "freebies" such as T-shirts, tote bags, hats, mugs and cash-back offers. The offers are tempting -- credit cards can be convenient and may help some students start a good credit record -- but credit cards also can plunge some people deep into debt and long-term credit problems.

Unfortunately, more and more students are slipping into high credit card debt, with very serious long-term consequences. Some students have trouble getting good jobs because employers review credit reports and frown on high debt. Some students will pay higher rates for car loans or mortgages. High debt may cause psychological problems from stress to suicide. And high debt forces some students to take on more paid work, reduce their academic load, or even drop out of school. (An administrator at Indiana Uni-versity said, "We lose more students to credit card debt than to academic failure.") Credit cards aren't "plastic money" - they create debt, and some of it is very expensive debt.

"Don't give yourself too much credit!" If you do get a credit card, determine what you can realistically afford to pay each month for credit purchases, based on your income and expenses. Plan to pay off your bill completely every month.

Proceed with caution. Whatever you do, don't be seduced into obtaining several credit cards and "maxing-out" on them with a high debt load. Don't play "the credit card shuffle" -- using advances on one card to pay down another.

Avoid the revolving trap. Don't think you can avoid trouble just by making the minimum payment each month. Here's an example: Say that you make only minimum payments and you run up a $1000 balance on a card with a 13% APR (annual percentage rate of interest.) Even if you never use that card again, if you continue to make only minimum monthly payments you will still owe over $500 three and one-half years later -- and paying off the debt will take over six years! (It will be much worse still if you are late on some payments and the card issuer raises your rate to 21% APR or higher!

Questions to ask when you consider getting a credit card:

Before you choose a credit card, shop around carefully. The most-visible card may not be the best for you. (Just because a card issuer has on-campus marketing rights does not necessarily mean it's the best one for you.) Check with your hometown bank or credit union. Shop, compare offers, and ask key questions:

What is the interest rate -- or rates? That's a crucial question, and you must work hard to determine the answer. Rates will be stated as the annual percentage rate of interest, or APR. Compare rates -- and read the fine print. Interest rates may vary from about 6% (a very low "teaser" rate) to 21% or more.
Some cards offer the low "teaser" rate, but only as an "introductory offer" for a few months -- and then they raise it to the "regular" rate. If you miss payments and become delinquent, some cards will start charging you a "penalty" rate of 20% or even 30%. No one expects to become delinquent, but it happens. Study the fine print and stay away from cards with penalty rates and other high rates. If the terms are so complicated you can't understand them, stay away from the card.

  • How much is the annual fee? Some credit card issuers charge annual member-ship or other participation fees, ranging from $25 to $50. A credit card with a slightly higher interest rate but no annual fee may be a better deal than a card with a lower interest rate and an annual fee, if you carry over a balance.
  • Is there a "free period?" Most credit card companies will not impose a finance charge if you pay the balance before the monthly due-date shown on your statement (the free period.) Others charge interest from the date of purchase. (Note that free periods often do not apply to cash advances.)
  • Are there hidden fees? Compare late-payment charges and over-the-limit fees -- which can reach $30 a "pop"! -- and charges for cash advances. Such fees add up quickly and make a credit card much more expensive than you planned.
  • Think twice before you go along with "add-ons" such as credit insurance or credit card "protection plans." More card issues are cross-marketing such products. They generally are not good values for the money -- they often just bulk up the balance on credit card debt and generate extra interest.
  • Check out a card's privacy policy. It should give you a chance to "opt out," so the card issuer may not sell your name to others. That can reduce your "junk mail" and the chance that unauthorized charges will be put on your account.

If you do obtain a credit card, work hard to pay off the balance completely every single month. If you don't do that, you probably will pay substantial interest payments and risk falling into debt and financial trouble. (Another example: If you make only a minimum $50 per month payment on a typical credit card balance of $3900, you will never pay it off.)

What's the bottom line? Consider whether you should just say no at this time to getting a credit card and taking on debt -- especially if you already have substantial student loans to pay off. If you do get a card, be extremely careful in selecting and managing your credit card account.

Here are some agencies that can offer more information and assistance: Your county Iowa State Extension Office, your school's financial counseling office, or the Iowa Attorney General's Consumer Protection Division, Hoover Building, Des Moines, IA 50319 (call 515-281-5926.)

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Copy of a news release on this topic: "Avoid Campus Credit Card Trap!"

Attorney General's letter to Iowa college and university newspaper editors on this topic: Letter to Campus Newspapers.

More Sources on Students and Credit Card Debt

Suggested by the Office of Iowa Attorney General Tom Miller

"Avoid the Campus Credit Card Trap," a PIRG Fact Sheet for College Students. PIRG is the U.S. Public Interest Research Group. Excellent tips for students.

"The Campus Credit Card Trap," a PIRG survey of 1,260 students from 15 campuses nationwide.

www.CreditCardNation.com This is web site of Robert Manning, the Georgetown University sociologist and expert on students and credit cards. Site includes info on two studies by Manning about credit cards on campus, and links to many articles on the subject from publications around the nation. (Click to "media reports" and "activities," for example.)

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