College Students Still Face Crippling Credit Card Rates

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Credit card lenders around the country are beginning to salivate as college students head to campus -- though not as enthusiastically as they once did. Young adults used to be a powerful debt-generating machine, and banks took full advantage. Then the CARD Act of 2009 made many of the old practices that lenders used to lure and keep college students in debt illegal. However, even with those changes, college student credit cards carry some of the highest annual percentage rates in the country, rivaling those of store credit cards.

The CARD Act Didn't Eliminate the Problem

Pre-CARD Act, college students could simply sign up for a card at age 18. Now, individuals younger than 21 cannot be offered pre-approved credit cards. They must have proof of income or a co-signer older than 21. But these restrictions don't make it hard for the average college kid to obtain plastic.

Post-CARD Act, credit card companies were largely banned from their old tricks of handing out free T-shirts, pens, tote bags or Frisbees to entice naive students. Instead of offering tangible goods, lenders moved to using rewards to lure college students to spend, spend, spend their way into owing money at cripplingly high annual percentage rates.

Analyzing the APR of Student-Targeted Credits Cards

A college student handling his or her first credit card is likely to pay an average annual percentage rate of 21.4 percent, according to a study of the top 50 U.S. banks by MagnifyMoney.com (where I work).

This is not much lower than the average retail credit card APR of 23.23 percent, which was noted as some of the highest in the country, according to a recent survey from CreditCards.com.

Bank of America (BAC) offers the lowest possible APR on a no rewards college student card, starting at 10.99 percent, but with a high of 20.99 percent. Its cash and travel rewards cards start at 12.99 and 14.99 percent, going up to 22.99 percent.

Cards like Citi's (C) ThankYou Preferred Card for College Students offers 2,500 bonus ThankYou points after spending $500 within the first three months of owning the card. The card also features double ThankYou Points on purchases for dining at restaurants and on entertainment. With a 23.99 percent APR, this card could easily lead college students into overspending to rack up 2,500 points for a measly $25 gift card to Chili's (EAT).

Many college students don't enter university with an established credit score. Lenders see someone with a lack of established credit history as a higher risk, so lenders are likely to be applying the highest APR to those students' credit cards.

Cost of Not Paying off a Card with a High APR

The guiding rule of a credit card is to only spend on the card what you can afford to pay off, on time and in full each month. Banks want to trick you into being a borrower and spending more than you can afford.

Unfortunately, many consumers -– college students or not –- fail to follow the pay-in-full rule and end up paying only the minimum due on the card each month.

This mistake is costly. A student who charges $1,000 on a credit card with a 21.4 percent APR and only pays the minimum due will end up paying a lender $1,941 for the privilege of borrowing a grand. It will also take 7.6 years to pay off the debt, according to a calculation by MagnifyMoney.com.

So, Why Should a College Student Have a Credit Card?

Responsible college students can use the four years in school to develop their credit score. Unless they can afford to make it through their entire lives without renting an apartment, getting a mortgage or taking out any loans, credit history will play an important role in their financial lives.

Using a single credit card in college, keeping the utilization ratio low and paying the bill off on time and in full each month can help a young adult achieve a healthy credit score before even tossing his or her cap at graduation.

The caveat: irresponsible young adults who easily fall into impulsive indulgences need to avoid the temptation of a credit card.

Oops, I Already Have Credit Card Debt

Paying the crushing APR on credit card debt can keep consumers in the red for years as their payments primarily go toward paying off interest instead of the principal. The process of digging out of debt can be expensive and time-consuming, but reducing the interest rate on debt can save consumers both time and money.

Balance transfers offer the opportunity to slash interest rates down to zero percent, which often makes the fee worth the cost.

Personal loans won't offer a zero percent interest rate, but they provide less complexity than credit cards with fixed payments at a set interest rate. Some lenders are even evaluating education instead of focusing solely on the traditional credit score.

MagnifyMoney.com offers a simple tool to evaluate how much consumers can save by paying off credit card debt faster with balance transfers or a personal loan.

Erin Lowry writes for DailyFinance on issues relating to millennials, money and personal finance. She is the blogger behind Broke Millennial, where her sarcastic sense of humor entertains and educates her peers. She is also the brand and content manager for MagnifyMoney.

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College Students Still Face Crippling Credit Card Rates
Yes they can.

The CARD Act did get rid of the most outrageous abuse: they can no longer increase the interest rate on existing balances unless you go 60 days past due.

However, you need to remember that:
  • Most credit card interest rates are variable and are linked to the prime rate. Your high rate will only go higher when interest rates increase.
  • Based upon risk, your credit card company can still increase your interest rate on all future purchases. Your existing balances are protected, but future purchases would be at the higher rate. And determining risk is not limited to your behavior on your existing card. If you miss a payment with another lender, that could lead to an increase on all of your credit cards.
  • After 12 months, they can increase your rate for almost any reason. But the increased rate only applies to future purchases, and they need to give you 45 days notice.

Credit cards are incredibly expensive ways to borrow money. If you use a card, your goal should be to pay off the balance in full every month. Then, the interest rate doesn't matter.

Bottom line: If you do have debt, you should never be paying the purchase APR. Look for a balance transfer, or get a personal loan to cut your interest rate. And take a long hard look at your spending to put more money towards paying off that debt.
 

No, they are not.

There is a big difference between a 0% balance transfer (where the interest is waived during the promotional period, discussed above) and 0% purchase financing offered at many stores (where the interest is only deferred).

I regularly encourage people to use balance transfers to help them pay off their debt faster. With a balance transfer, interest is switched off or reduced during the promotional period. Once the promotional period is over, interest starts to accrue on a go-forward basis. This can take years off your debt repayment.

But stores offer 0 percent financing at the checkout. With a lot of these programs, interest is charged from the purchase date if you do not pay off the balance in full during the promotional period. So, if you have a 12-month 0 percent offer -– and do not pay off the balance in 12 months -– then in month 13 you will be charged a full 13 months of interest. They retroactively charge interest, and it will be like you never had a 0 percent offer at all.

 

This is a common practice. Online, Apple (AAPL) does this, via their partnership with Barclaycard (BCS).

And stores like Walmart (WMT) do the same thing.

Bottom line: I don't like deferred interest deals. Most people do not understand the difference between waived and deferred interest, and this practice feels deceptive. If you take one of these offers, make sure you pay off the balance in full before the promotion expires.
 

Not always.

Credit card companies have different rates for different types of transactions. The interest rate charged on a purchase (high) is different from a balance transfer APR (low).

Before the CARD Act, banks would apply your payment to the lowest APR balance first. Imagine you have a $1,000 balance. $500 is at 0 percent (balance transfer), and the other $500 is at 18 percent (purchase). If you make a $100 payment, banks would apply that to the balance transfer. That way, they reduce the balance transfer (at 0 percent) to $400, while protecting the $500 purchase balance (at 18 percent).

The CARD Act changed that. Banks now need to apply payments to the highest interest rate first. But this only applies to payments higher than the minimum due.

If you only pay the minimum due every month, your payment will still likely be applied to the lowest interest rate balance first.

Bottom line: You should never spend and have a balance transfer on the same credit card. Banks can only "trap" balances when you have multiple balance types on one card.
Not exactly true.

The CARD Act has stopped the handout of T-shirts on the steps of the school libraries, but they can still give sign-on bonuses. And they advertise on campus. For example, Citibank (C) has a "Thank You Preferred" card for college students. If you spend $500 in the first three months, you get 2,500 thank you points as a bonus. That is $25 of value.

Bottom line: I actually find this worse. Before, you got a free T-shirt just for signing up. Now, the credit card companies encourage spend on the card for the "free gift."

In the past, banks would charge you a fee if you went over your credit limit. Today, the CARD Act requires banks to receive your consent to charge an over-limit fee. So, in most cases, banks just eliminated those fees -- which is good news (kind of).

You can still go over your credit limit, if the bank approves your transaction. But the full amount by which you've exceeded your limit will be part of your minimum payment come the next bill, which could cause a payment shock.

More importantly, utilization (the percentage of your available credit that you use) is a big factor in your credit score. Your credit score determines the price you pay for credit. So, if you're over-limit on an account, you are considered riskier. That can result in the credit card company increasing your interest rate. And it could also result in other lenders increasing your rates with them. So you do pay, but it's an indirect cost.

Bottom line: We're glad the fee is gone, but you still need to be diligent and try to avoid going over your limit. If you pay your balance in full every month but are frequently bumping up against your credit limit, ask for a credit line increase.

Completely false.

I have heard from so many people that the way to eliminate overdraft fees is to opt out of overdraft protection. But it is impossible to completely opt out of overdraft.

Federal regulation requires consumers to opt into overdraft protection only for debit and ATM transactions.

But, the regulation does not cover checks and electronic transactions (including bill-pay and monthly direct debits, like gym memberships). The banks have all the power. If they approve the transaction, you would be charged an overdraft fee (typically $35 per transaction at banks and $25 at credit unions). If they decline the transaction, then you would be charged an NSF fee (non-sufficient funds), which is usually just as expensive as the overdraft fee.

Bottom line: You can't opt out of all overdraft fees. To avoid them, keep a buffer or find an account, like Ally, that doesn't charge those junk fees.
Not always true.

To be protected, you need to report the fraudulent transaction within 60 days. Otherwise, you give up a lot of your rights.

On ATM/debit cards, the bank can make you responsible for up to $500 of fraud if you report more than two days (but less than 60 days) after the transaction. On a credit card, you would never be liable for more than $50 (and most banks won't even hold you accountable for $50.)

One area where you will almost always lose is when your Personal Identification Number is used. If someone manages to get your PIN and takes money out of your account, then the bank will almost always assume that you authorized the transaction. Make sure you change your PIN often and never write it down.

Bottom line: Avoiding liability it your responsibility. Track your transactions regularly and call as soon as you detect any suspicious activity. And make sure you never share your PIN with anyone, or make it obvious.
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