Credit Card Debt

As reported here last week, it’s becoming increasingly clear that credit card debt remains a serious problem for many millions of Americans. So yesterday’s advice from Keloland Television should prove timely for many readers. It suggests that, if you’re struggling to pay down your credit cards, you should:

• Budget even more carefully than usual so that you know precisely how much you have to spend.
• Look for ways to cut costs and/or boost income, perhaps with a second job.
• If possible, stop charging altogether, but certainly try to avoid adding to balances.
• Call your credit card companies. Be honest about your problems and ask for lower rates.
• Look at the options provided by balance transfer credit cards with a zero or low rate.

However, Keloland Television warns about a catch with many balance transfer credit cards: “If you don’t have the whole balance paid off at the end of the transfer period then you’re charged interest from day one on the whole balance.”

The report also advises that you list the balances outstanding on all your cards. Then, pay the minimum on them all, and, say, an additional $25 a month (or whatever you can afford) on the smallest. Once that’s paid off, pay off the next smallest balance using the $25 or whatever, plus the minimum payment you no longer have to make on the first account. Carry on until all balances are zero.

Credit Card Rewards Programs

Also yesterday, the Los Angeles Times provided advice for those who use credit card rewards programs. It warned that many of these are being watered down, and companies are introducing or hiking fees. And it recommends reviewing your rewards as follows:

• If you use your rewards for flights, try to concentrate your flying with a single airline partnership alliance
• Think about transferring miles between programs
• Consider swapping to a hotel program or cash-back credit card because points with these are often easier to redeem

Student Credit Cards

Recent credit card regulation has tightened up the rules surrounding cards and young people. Perhaps most importantly, credit card companies are no longer allowed to issue cards to anyone under 21 years old unless that person can prove that he or she has the independent means necessary to make payments or can find an adult to co-sign the credit card application.

Although many welcome this and other rules as a valuable way to prevent naive and inexperienced young people from getting excessively into debt, it does bring a whole new set of problems for parents. As the New York Times pointed out last week, they now have to decide whether to:

• Co-sign a credit card application and risk their own credit scores
• Make their offspring an authorized user of one of their own cards and be ready to mop up after them
• Insist their child use cash, a debit card, or a pre-paid credit card and possibly encounter resentment

Each of these has the potential to cause ructions in any family, and the Times suggests that parents should make their choice based on their past experiences with their child. And, perhaps, student credit cards should be reserved for those who have already proved themselves financially responsible.

Credit Card Debt

As reported here last week, it’s becoming increasingly clear that credit card debt remains a serious problem for many millions of Americans. So yesterday’s advice from Keloland Television should prove timely for many readers. It suggests that, if you’re struggling to pay down your credit cards, you should:

• Budget even more carefully than usual so that you know precisely how much you have to spend
• Look for ways to cut costs and/or boost income, perhaps with a second job
• If possible, stop charging altogether, but certainly try to avoid adding to balances
• Call your credit card companies: be honest about your problems, and ask for lower rates
• Look at the options provided by balance transfer credit cards, with a zero or low rate

However, Keloland Television warns about a catch with many balance transfer credit cards: “If you don’t have the whole balance paid off at the end of the transfer period then you’re charged interest from day one on the whole balance.”

The report also advises that you list the balances outstanding on all your cards. Then, pay the minimum on them all, and, say, an additional $25 a month (or whatever the most you can afford is) on the smallest. Once that’s paid off, pay off the next smallest balance using the $25 or whatever, plus the minimum payment you no longer have to make on the first account. Carry on until all balances are zero.

Credit Card Rewards Programs

Also yesterday, the Los Angeles Times provided advice for those who use credit card rewards programs. It warned that many of these are being watered down, and are introducing or hiking fees. And it recommends reviewing your rewards as follows:

• If you use your rewards for flights, try to concentrate your flying with a single airline partnership alliance
• Think about transferring miles between programs
• Consider swapping to a hotel program, or cash-back credit card, as points with these are often easier to redeem

Student Credit Cards

Recent credit card regulation has tightened up enormously the rules surrounding cards and young people. Perhaps most importantly, credit card companies are no longer allowed to issue cards to anyone under 21 years old unless:

1. that person can prove that they have the independent means necessary to make payments, or
2. he or she can find an adult to co-sign the credit card application

Although many welcome this, and other rules as a valuable way to prevent naive and inexperienced young people getting excessively into debt, it does bring a whole new set of problems for parents. As the New York Times pointed out last week, they now have to decide whether to:

• co-sign a credit card application, and so risk their own credit scores
• make their offspring an authorized user of one of their own cards, and be ready possibly to mop up after them
• insist on cash, a debit card or a pre-paid credit card being used, and possibly encounter resentment

Each of these has the potential to cause ructions in any family, and the Times suggests that parents should make their choice based on their past experiences of their child. And, perhaps, student credit cards should be reserved for those who have already proved themselves financially responsible.

Credit Card Regulation Only a Week Away

After what has felt like an eternity, the Credit CARD Act of 2009 finally comes fully into force (except for certain provisions that affect gift cards) on February 22. And few will breathe a bigger sigh of relief than parents whose children have student credit cards.

That’s because credit card companies long ago began to direct their slick marketing techniques toward those on college campuses. Of course, they saw all youngsters as potential new customers who could remain loyal credit card users for decades. But students were particularly valuable because college graduates are more likely than most to be both affluent and, consequently, good credit risks.

Credit Card Companies on Campus

Back at the end of 2008, the New York Times investigated some of the methods that card issuers used to target students. Perhaps the most surprising fact uncovered in the subsequent report was that hundreds of colleges across the country had signed agreements with card companies. In fact, Bank of America alone had 700 such deals in place at that time.

Many contracts contained confidentiality clauses, so their details remain unknown. But the Times found that one university received a dollar for every successful credit card application (as long as the account wasn’t closed within 90 days), three dollars for each card with an annual fee, and half-a-percent of all the retail purchases made using cards that fell within the deal.

The Times quoted a student newspaper editorial from a different university: “…it doesn’t take a giant leap for someone to ask why the university should encourage responsible spending when it receives a cut of every purchase.”

New Protections

As of next week, the new credit card regulations sweep away these cozy deals, along with the ubiquitous tents, and stands that credit card companies used to erect on campuses. Gone too willbe the T-shirts, blankets, sandwich vouchers, and other promotional goodies that card issuers used to exchange for completed credit card applications.

Because the Credit CARD Act not only outlaws these, but also makes it illegal to issue a card to anyone under 21-years old who does not have independent means unless their parent, guardian, or another adult co-signs the agreement. Even then, the adult will have to give written permission before the credit limit on the card can be raised.

Giving Leverage to Parents

This provides parents with some much-needed leverage when protecting their offspring from unmanageable credit card debt. And if those parents believe that their child is unable to take responsibility for a credit card at all, then it allows them to insist that the student use only cash, or a combination of cash and a debit card.

Of course, there are real advantages to having cards for those who can manage them responsibly. Part of one’s credit score is based on the length of one’s credit history. So, for example, college graduates who haven’t had a card could pay more for, say, a car loan when they’re 23 or 24 years old. They might even be declined completely.

Credit Cards and the Young

It’s generally a mistake to see credit cards as instruments of the devil and credit card companies as invariably evil. In the modern world, it can be tough to get by without a card, and many students learn very successfully how to manage their finances during their college years.

But few will mourn the passing of the years that saw credit card issuers regarding campuses in much the same way that the cowboys wearing black hats used to view small, wild west towns. And most parents welcome the opportunity to participate more actively, and (if they have any sense) more constructively in their children’s financial lives.

Student Credit Cards Beneficial…

Earlier this week, the Daily Illini, an independent student newspaper for the University of Illinois, ran a feature about how new state and federal credit card regulation is likely to affect students. Having described the probable impact, the piece went on to observe that “Some students at the University said they think the laws are overprotective.”

And it went on to quote from an interview with Oana Toma, who is a 21-year old sophomore in Engineering. She pointed out that it is not only those who are under 21 who find themselves in trouble with credit card debt. Many much older people encounter similar problems. And she went on to remark:

This is the time we all need to be building credit. We will need good credit to buy a house or a car in the future. A lot of students just use it [a credit card] like a debit card. They are responsible with it, and they monitor how much they are spending.

…But the Drawbacks Are Serious

Of course, Ms. Toma is right to highlight the many benefits that credit cards can bring to students. But others take a sharply different view. They argue that young people, who, by definition, are relatively inexperienced in financial matters, are especially vulnerable to what they see as predatory credit card companies. And a recent study by Gallup for Sallie Mae suggests they may be right.

Sallie Mae’s report, published last April, but based on a 2008 survey, certainly contained some scary statistics:

• Half of all students had four or more cards
• Only 15 percent of freshmen had a zero balance
• The median credit card debt carried by freshmen nearly trebled between 2004 and 2008–from $373 to $939
• The average credit card debt on graduation was $4,100
• Nearly a fifth of seniors had balances totaling more than $7,000
• Sixty percent of students were surprised at how high their balances had grown
• Balances were carried forward–and finance charges paid–by 82 percent of all students surveyed

Student Credit Cards: Some Good Advice

The Consumers Union last August issued advice to students who are considering making a credit card application. It identified seven key rules that can help young people (and, come to think of it, everyone else) to steer clear of trouble:

1. Don’t fall for the credit card companies’ slick marketing campaigns
2. Make sure you can really afford to borrow money with a credit card
3. If you decide to get a credit card, shop carefully and make sure you understand your contract
4. Don’t be tricked by the teaser rate
5. Don’t use your credit card to finance your education
6. Use your card wisely
7. Don’t co-sign for your friends

Whether or not you’re a student, the first step to a happy relationship with your card is to shop around for the best credit card rates.

Students Wave Goodbye to Credit Cards

The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 is going to introduce new protections for students when it goes into effect in February 2010. These include:

• A ban on issuing cards to those under 21 years old, unless they have either a co-signer or proof that they can make repayments
• A ban on the gifts and incentives (free food, T-shirts, Frisbees, and so on) that card issuers “give” to students who fill in credit card applications
• A ban on the marketing of cards on all campuses that are frequented by those under 21

How Bad is Student Credit Card Debt?

In April of 2009, Sallie Mae, which describes itself as “the nation’s leading provider of saving, planning, and paying for education programs,” published the results of a study it conducted in the spring of 2008.

Among the findings were:

• The large majority of undergraduates (84 percent) had at least one credit card, and half of college students had four or more
• At $3,173, the mean balance was the highest since the study began in 1998
• Only 15 percent of new students had a zero balance on their credit card, compared with 69 percent in 2004
• More than 80 percent did not pay off their balance in full each month, and consequently incurred interest charges
• Forty percent of respondents admitted to charging items to their cards, even though they knew that they lacked the funds to pay the bill
• The average credit card debt of a senior on graduation was more than $4,100, up from $2,900 in 2004

A Worrisome Picture

All of this adds up to a disturbing picture of high credit card debt, and irresponsible card usage among the people who will be running this nation in the future. And you can see why legislators want to remove the temptations posed by cards.

But there is another side to this coin.

Punishing the Innocent Along with the Guilty

Perhaps the most obvious argument against greater regulation is that it punishes the innocent–those students who use their cards responsibly–along with the guilty. Of course you can say that effectively banning many students from holding credit cards protects those in the minority who use them inappropriately.

But if that’s the case, why not ban all credit cards? That would protect those in the minority of adults in the general population who use them inappropriately. What’s the difference?

Real Hardship

Of course, credit card debt can cause real hardship. But denying access to credit can have just as damaging effects.

The Sallie Mae study found that 92 percent of respondents put textbooks and other educational necessities on their credit cards. And 30 percent charged tuition. What happens to those students when access to this line of credit is denied them?

And, what happens to the 84 percent who charge food and the 70 percent who charge clothing?

Will some of them go hungry? Will some have to quit education altogether? Will some be driven to take out even more expensive, sub-prime personal loans from unscrupulous lenders? These are all questions that need to be asked to determine whether CARD is really a good deal.