Avoiding Credit Card Hazards in College
Road Map To Avoiding Credit Card Hazards
guide for getting a credit card, avoiding credit troubles
and clearing up your credit problems. Written by staff of
the MASSPIRG Education Fund and made possible in part
through grants from the Consumer Federation of America
Foundation, Consumers Union, the Washington State Attorney
General's Office and the Consumer Protection Education Fund
established pursuant to the settlement of a fifty-state
enforcement action against Sears, Roebuck and Co.
credit card companies intensify their marketing campaigns to
boost profits, more and more glossy credit card offers are
coming at us fast and furious. The average household
receives eight credit card offers each month, and students,
who often have no regular income, are encouraged several
times a week by posters, flyers, and on-campus marketers to
apply for credit cards.
the same time, credit card companies are charging interest
rates as high as 40% per year. Consumers are subject to a
host of unfair and deceptive terms and conditions, saddled
with enormous fees, and encouraged by credit card companies
to make low minimum payments so that the companies can earn
more money in the form of interest.
result, the average credit card debt for Americans who carry
balances reached an all-time high of $5,610 in 2000, an
increase of one-third since 1995. As consumers struggle,
credit card companies such as Providian and First USA are
making bigger profits than ever. Between 1995 and 1999,
thanks in part to aggressive marketing and misleading
practices, companies' profits nearly tripled, jumping from
$7.3 billion to $20 billion.
Ahead: 10 Credit Card Traps
More Late Fees Credit card companies are reaping more
profit from late fee income than ever before, for three
reasons: (1) the average late fee more than doubled between
1992 and 2000, from $12.53 to $27.61, (2) companies have
decreased the amount of time between when they mail a bill
and when payment is due, and (3) nearly two-thirds of
companies have eliminated leniency periods, (the time after
a payment's due date before a late fee is assessed).
Higher Over-the-Limit Fees In 2000, only one card
charged a fee of less than $20 to consumers who had exceeded
their credit limits. The highest fee was $35. In contrast, a
1995 survey found only one bank that charged a fee of $20 or
more. Many companies assess this fee to cardholders who
exceed their limits by as little as $1.
Hidden Transaction Fees Fees for cash advances, balance
transfers, and quasi-cash transactions like the purchase of
lottery tickets significantly raise the cost of these
transactions. But the terms governing these transactions are
buried in the fine print where consumers can easily miss
them. Minimum fees, also stated only in the fine print,
allow credit card companies to guarantee themselves high fee
income regardless of the transaction amount. For example, if
XCard has a transaction fee of 3% and a minimum of $10, a
cardholder who receives a $50 cash advance will be charged
the minimum, $10, which amounts to an actual transaction fee
Punitive Annual Percentage Rate (APR) Increases The
average penalty APR—a higher interest rate triggered by a
late or missed payment—is nearly eight percentage points
higher than the average regular (non-penalty,
non-introductory) APR. In 1998, by contrast, penalty APRs
were an average of 4.5 percentage points higher than regular
Declining Grace Periods While grace periods (the time
during which a transaction does not accrue interest)
historically were a full month long, they now average 23
days. Some cards have no grace periods at all.
Introductory APRs Fifty-seven percent of card offers
advertised a low introductory APR. The average introductory
APR was 4.13% and lasted an average of 6.8 months. But
credit card companies use low, short-term introductory APRs
to mask regular APRs that are an average of 264% higher.
These sharp rate increases are not prominently disclosed.
Low Minimum Payments Low minimum monthly payments are
designed to sound attractive to consumers, but they
encourage cardholders to pay more in finance charges as the
length of time required to pay off a balance increases
significantly. Credit card companies have decreased minimum
payments in recent years from the historic industry standard
of 5% to a current standard of 2% to 3%.
"Fixed" APR Despite their name, so-called
"fixed" interest rates can be raised with as
little as 15 days notice to cardholders.
"Bait and Switch" Credit Card Offers Direct
mail credit card offers generally advertise the premium card
the bank has to offer, yet the fine print includes the
caveat that the company can substitute a lower-grade,
non-premium card if the applicant does not qualify for the
premium card. The lower-grade card costs more and offers
less attractive terms, facts which are rarely mentioned in
the official disclosures of the offer.
Tiered Pricing This new, anti-consumer practice is
catching on quickly with credit card companies. In an offer,
the company quotes a meaninglessly-wide range of possible
APRs: Providian's Aria card, for example, quotes a range of
7.99% to 20.24%. The company then assigns an APR to each
applicant once the card is issued, based on the applicant's
credit history. Consumers are thus being denied the right to
know the terms of a credit card before they accept an offer.
at the Wheel: Navigating Credit Card Offers
Shop around before accepting a credit card offer. Terms
and conditions vary widely, so it's important to compare
offers–for example, regular APRs range from 7.99% to
30.25%. Key fees and terms to compare:
• regular (non-introductory) APR: look for APRs near or
• grace period: at least 25 days
• late payment fee: no higher than $20
• annual fee: look for cards with no annual fee (most do
not have annual fees)
• penalty APR: look for cards that don't assess penalty
APRs, or if unavoidable, penalty APRs no higher than 20% and
in place for a limited period of time only (for example,
until two consecutive payments are made on time)
Read the fine print. Disclosure charts and surrounding
text–carefully and thoroughly before accepting a card.
Many punitive fees are stated only in the fine print below
the disclosure chart.
Carry only one or two major credit cards, and avoid using
the full available credit line. Remember that credit
card purchases are more expensive than cash or check
purchases once interest and other fees are included. Use
credit cards sparingly and wisely.
Pay off all balances in full every billing period, or
pay as large a portion of the remaining balance as possible,
making the largest payments toward the card with the highest
interest rate. Always pay more than the minimum, if
Reduce the number of direct mail credit card solicitations
you receive by calling 1-888-5-OPTOUT. This will remove
your name from pre-screening lists at the three major credit
Seek credit counseling as soon as financial problems
arise. To locate a free or low-cost credit counseling agency
near you, call 1-800-388-2227 or visit www.nfcc.org.
For one-on-one counseling over the phone, call
1-800-680-DEBT, or visit www.myvesta.org
on the Internet.
Check your credit reports at least once a year for errors.
Correct any errors immediately. Consumers in CO, GA, MA, MD,
NJ, and VT are entitled to one free report per bureau per
year; consumers in other states may have to pay up to $8 per
report. To receive copies, call: Equifax 1-800-685-1111
Experian 1-888-397-3742 TransUnion 1-800-888-4213
If you believe you are the victim of unfair interest rate
charges, late fees or other penalties, or deceptive
marketing, and the credit card company fails to address your
complaint, file complaints with your state Attorney
General's office and the national Office of the Comptroller
of the Currency:
• visit: www.occ.treas.gov/customer.htm
• call: 1-800-613-6743, (M-F 9am-3:30pm CST)
• e-mail: Customer.Assistance@occ.treas.gov
• fax: 1-713-336-4301 or;
• mail: Customer Assistance Group 1301 McKinney Street,
Suite 3710 Houston, Texas 77010
Use the credit calculator, available online at
www.truthaboutcredit.org, to calculate how much you need to
pay each month to pay off your balance within the time frame
you've specified. The calculator can also tell you how long
it will take to pay off your balance if you continue to pay
the same amount each month.
Know your financial means and limitations, and don't
spend beyond your means. Create a budget that takes into
account your average credit card payments each month, and
stick to it.
Signs: Terms You Should Know
Percentage Rate (APR): The amount of interest assessed
on an outstanding credit card balance. For billing purposes,
the APR is usually divided into periodic (monthly or daily)
rates. A variable APR, often referred to as "prime +
x%," is tied to an economic market index such as the
Prime Rate; thus it fluctuates with the economy. A fixed APR
does not fluctuate with the market; rather, it is set by the
credit card company. The company can change it at any time
with as little as 15 days notice to cardholders.
Penalty APR: A much higher, punitive interest rate
that credit card companies may apply to cardholders who have
exceeded their credit limits, made one or more late
payments, or are otherwise in "bad standing."
Penalty APRs are, on average, about 52% higher than regular
Credit Limit (or Line): The maximum, cumulative
amount of money a consumer may borrow from a credit card
company. Credit limits are set based on a consumer's credit
history; however, this does not necessarily mean that the
limit is one that the consumer can afford.
"Pre-Approved": This term is misleading
and does not mean that a consumer is guaranteed to receive
the card for which s/he has applied, or any card at all. It
merely means that the consumer was chosen to receive the
offer because s/he met some initial criteria of
Grace Period: The time during which a transaction
does not accrue interest. Grace periods range from 0-30
days, with an average of 23 days, and they often apply only
to purchases, not cash advances or other transactions. On
most cards, grace periods only apply if the previous
month’s balance is paid in full and on time.
Transaction Fee: Cardholders are nearly always
assessed additional fees for transactions other than
purchases (such as cash advances). The fee is usually a
percentage of the transaction, but a minimum fee may apply.
Transaction fees may or may not be capped.
Quasi-Cash Transaction: A transaction similar to
cash, such as the purchase of lottery tickets or betting
chips. These are usually subject to transaction fees.
Cash Advance: An immediate cash loan from a
consumer's credit card account. Cash advances may carry a
higher APR than purchases, and often are assessed
transaction fees. Grace periods may not apply to cash
Balance Transfer: At a cardholder's request,
credit card company A will pay the balance the cardholder
has with company B, and the balance will then be put onto
the cardholder's account with company A. Consumers usually
transfer balances when applying for a new card, to take
advantage of low introductory APRs. Balance transfers
usually incur transaction fees.
Schumer Box/Disclosure Chart: The disclosure chart
contains the most important information of the offer
(although not all important information is included in it).
By law, the disclosure chart must contain:
1. the actual APR (that is, what the APR will be once the
introductory period ends)
2. the formula for the APR, if the rate is variable
3. the length of the grace period
4. the amount of the annual fee, if any
5. the minimum finance charge
6. any transaction fees (for example, fees for cash
7. the method of computing the purchase balance for each
8. late payment fees, and default or delinquency fees
9. over-the-limit fees
Methods of Computing Balances: Methods used vary
widely and have a significant effect on the cost of credit.
There are three main methods:
1. Average Daily Balance. This is the most common
computation method. Road Signs: Terms You Should Know The
outstanding balances for each day in the billing cycle are
added, and this total is divided by the number of days in
the billing cycle. New purchases may or may not be added,
depending on the terms of the card. If the terms state that
new purchases are included, purchases made during the
billing cycle will raise a cardholder's balance and may
increase the finance charge. Once the average daily balance
is calculated, interest is assessed each day at the daily
rate, which is the annual percentage rate divided by 365.
2. Adjusted Balance. Payments or credits that are
received during the current billing period are subtracted
from the balance at the beginning of the billing cycle. New
purchases are not included in the calculations. For example,
if a cardholder's beginning balance was $2000, and s/he made
a payment of $500 during the billing period, s/he would only
be charged interest on the remaining $1500. This is
generally the most consumer-friendly computation method.
3. Two-Cycle Balance. To obtain this balance,
credit card companies add together the average daily
balances for the current and the previous billing cycles.
The average daily balances for the current billing period
may or may not include new purchases. The two-cycle balance
method is the least consumer- friendly method of balance
Secured Credit Card: This type of credit card is
linked to a bank account, allowing a credit card company to
deduct payment if the cardholder fails to pay. To obtain a
secured card, a consumer must deposit an amount of money
equal to the credit limit of the card into a bank account.
This account is separate from any other accounts the
consumer may have.
Debit Card: Debit cards are not credit cards;
rather, they deduct money directly from the cardholder's
bank account whenever a transaction is made with the card.
Consumer protections guaranteed by law to credit card users
often do not apply when a debit card is used.
Zone: College Students And Credit Cards
saturated the working adult population with credit card
offers, credit card companies are now banking on a new
market: college students. Under regular credit criteria,
many students would not be able to get a card because they
have no credit history and little or no income. But the
market for young people is valuable, as industry research
shows that young consumers remain loyal to their first cards
as they get older. Nellie Mae, the student loan agency,
found that 78% of college students had credit cards in 2000.
Credit card companies have moved on campus to lure college
students into obtaining cards. Their aggressive marketing,
coupled with students’ lack of financial experience or
education, leads many students into serious debt.
• Undergraduates with credit cards carried an average
balance of $3,071 in 2000. (Source: National Postsecondary
Student Aid Study)
• Half of all college students with credit cards
don’t pay their balances in full every month.
• 58% of college students reported seeing on-campus
credit card marketing tables for two or more days within a
one month period at the beginning of the semester.
• On a test of personal finance skills administered to
high school seniors, students averaged a score of 57%, an F
on any grading scale. Only 5% of the seniors scored a C or
(Source: Jump Start, www.jumpstart.org)
School Zone: College Students and Credit Cards
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