The College Student’s Guide to Credit Cards

Student credit cards kind of remind me of the movie, A Few Good Men, starring Tom Cruise and and Jack Nicholson. If you've seen the movie, you remember well Lt. Daniel Kaffee's (Cruise) cross examination of Col. Nathan R. Jessep (Nicholson). In that powerful cross examination, all Lt. Kaffee wants is the truth:

When it comes to student credit cards, the truth is all we want, too. We want to peel away all the marketing hype that surrounds student cards, understand the pros and cons, risks and rewards of student cards, and then make an informed decision.

And to do that, we've created this College Student's Guide to Credit Cards. The aim of this guide is not to convince anyone that credit cards are good or bad. Instead, the guide is designed to arm college students (and parents) with the information they need to make sound financial decisions about credit cards. The guide presents information to help students understand the risks of credit cards, determine if they need a credit card, and evaluate the various student credit card options and alternatives.

So let's get to it. In this Guide, we'll cover the following topics:

Student's Guide to Credit Cards--Table of Contents

• The Realities of Student Credit Cards—What You Should Know
• How Student Credit Cards are Promoted on Campus—And How to Survive the Marketing Blitz
• Should You Get a Card--The Pros and Cons of Student Credit Cards
• How to Evaluate A Student Credit Card Offer
• How to Manage and Use a Credit Card Responsibly
• 3 Alternatives to a Student Credit Card

The Realities of Student Credit Cards—What You Should Know

The use of credit cards by college students has increased significantly in recent years. A study released by Sallie Mae in 2009 shows that as of 2008, 84% of undergraduates had at least one credit card, while half of all college students had four or more credit cards. The average number of cards has also grown to 4.6, according to the study.

With the growing number of students carrying credit cards, it is only natural that the outstanding balances on the cards also increase. The Sallie Mae study's key findings reveal an alarming trend of increasing credit card debt among college students:

• Record-high credit card balances: The average (mean) balance grew to $3,173, the highest in the years the study has been conducted. Median debt grew from 2004’s $946 to $1,645. Twenty-one percent of undergraduates had balances of between $3,000 and $7,000, also up from the last study.
• Fewer students with zero balance: In spring of 2008, only 15 percent of freshmen had a zero balance, down dramatically from 69 percent in the fall of 2004. The median debt freshmen carried was $939, nearly triple the $373 in 2004.
• More students charging educational expenses: Ninety-two percent of undergraduate credit cardholders charged textbooks, school supplies, or other direct education expenses, up from 85 percent when the study was last conducted, in 2004. Nearly one-third (30%) put tuition on their credit card, an increase from 24 percent in the previous study.
• Students surprised at high balances: Sixty percent experienced surprise at how high their balance had reached, and 40 percent said they have charged items knowing they didn’t have the money to pay the bill.
• Most students carry a balance: Only 17 percent said they regularly paid off all cards each month, and another 1 percent had parents, a spouse, or other family members paying the bill. The remaining 82 percent carried balances and thus incurred finance charges each month.
• Average credit card balances going up: The average balance on undergraduate students’ credit cards is more than $3,000. As students get closer to graduation, their credit card debt also grows. College seniors graduated with an average debt of $4,100 in 2008.

To make matters worse, colleges and universities have started charging students an additional fee when they pay tuition with a credit card. The Chicago Sun Times recently reported that schools across the country have added a 2.75% "convenience fee" for students charging their tuition.

This fee is significant given that it is estimated that 90% of undergraduate students pay for expenses directly related to their education – such as books, supplies or tuition – with credit cards each year.

So what does all this mean? It means that credit cards need to be treated with respect. While they offer convenience and security, they can also create significant financial difficulties. We'll talk about the pros and cons of student credit cards in a moment, but first, let's take a quick look at what students can expect on campus from credit card promotions.

How Student Credit Cards are Promoted on Campus—And How to Survive the Marketing Blitz

For years credit card companies have marketed their student cards on campus. Colleges and universities have received compensation in exchange for giving card companies access to students and even information about the students. That practice is coming to an end because of the Credit Card Act of 2009, but the promotion of cards to college students will continue in some fashion.

The Credit Card Act of 2009, signed into law earlier this year by President Obama, will significantly restrict a credit card issuer's ability to market cards on campus. The law, however, does not go into effect until February 2010, so students may still see significant marketing activity on campus this fall.

One marketing strategy is to use affinity cards. An affinity credit card program "allows an organization to offer its members and supporters--those who have an "affinity" for that organization--a credit card that promotes the organization's brand and imagery each time a cardholder uses the card. An affinity credit card program also pays the organization a bonus for each new account generated, plus a percentage of every transaction charged to the card. This payment is funded by the bank that issues the credit card," according to Wikipedia.

Colleges and universities have used affinity programs to promote credit cards. Bank of America, for example, offers an affinity card for just about every major college and university. While these cards have significant appeal to some students, school spirit should not be expressed through a credit card.

Another marketing practice is to promote cards through campus clubs and student organizations. Credit cards are often promoted at school events and coupled with free promotional items in exchange for completing an application.

Here are some tips to deal with credit card marketing promotions and schemes:

• No quick decisions: The decision to apply for a credit card should never be made on the spot. If a college club or organization is marketing cards, don't sign up right there. If you are interested in the card, take the information home and think about it for a few days.
• Forget affinity cards: Having a picture of your college on a credit card should be the last consideration when selecting a credit card. If you chose to get a card, evaluate the terms and conditions of the card and pick the one that's best for you, not your school.
• Avoid peer pressure: Peer pressure comes in many forms. While it might surprise some, peer pressure is even part of credit card marketing. Clubs and campus organizations have in the past made money to fund their operations through the marketing of credit cards. Don't let these groups talk you into a decision that ultimately may be great for them, but not so good for you.

Should You Get a Card--The Pros and Cons of Student Credit Cards

The pros and cons of using a student credit card, or any credit card for that matter, come down to one thing--will you pay off the balance in full every single month without fail? For those that pay off the balance, they can enjoy cash back, travel, or other credit card rewards without the financial burden of high interest payments. In stark contract, those the carry and grow their balance from month to month will pay more in interest than any rewards they receive from the card.

With that, here are some of the pros and cons of carrying student credit cards:

Pros

• Emergencies: A credit card can be used in emergencies when cash is not available. This can be particularly important with college students who are away from home. For example, perhaps a death in the family occurs and it becomes necessary to travel home at the last minute. Or a student may find a need to purchase an expensive textbook at the last minute for a research project.
• Security: Students can shop securely with a credit card. Due to a cardholder's limited liability should the card number be stolen, credit cards are a safe way to purchase items over the Internet. As online shopping grows in popularity, students may find better deals on books and school supplies on the internet and ultimately save money by using a credit card to make these types of purchases. There is also no need to carry cash, which runs the risk of being lost or stolen. Making purchases with credit cards also allows you to track your spending habits. This is especially helpful if something is stolen from you, or if a case of fraud or identity theft arises.
• Card Rewards: Credit cards come with a variety of cash back reward systems that students can use for a variety of purposes. Whether they need to earn frequent flyer miles to travel home for the holidays or save extra cash for tuition payments, credit cards feature unique rewards systems that can provide many advantages for students.
• Building Credit: In preparation for larger purchases in the future – such as a car or house – students can start building a credit history by using a credit card responsibly in their early years. A credit card is one of the fastest and easiest ways to add life to a credit report and build financial trustworthiness.

Cons

• Interest Charges: The biggest risk for students is failure to pay balances in full each month, resulting in high interest charges that come with being an inexperience card holder with a weak credit history. Carrying a balance costs a lot more in the long run than paying off charges each month.
• High Interest Rates: Student credit cards typically charge higher interest rates than many other cards. The reason is that students present a higher credit risk because they typically are making little if any money and have a limited credit history.
• Overspending: Studies show that people in general tend to spend more frivolously with a credit card than with cash or checks. Students are at high-risk to spend more than they can compensate for each month when using a credit card. Credit cards should not be used in lieu of another source of income.
• Bad Credit History: If payments are made late or not at all, a student's credit report will reflect this activity. As a result, rather than building a solid credit score and history, students may find that credit cards have hurt their credit record.
• Cosigners: Some students will not be able to obtain a credit card without a cosigner. This means that someone else will become responsible for the debt if the student does not manage their financial responsibilities. There is always a risk of embarrassment and relationship strain where a cosigner is involved.
• Additional Fees: Credit cards feature a plethora of extra charges if not used carefully. Fees for late payments and over-the-limit charges can prove especially daunting for students. Credit card companies also have the ability to increase your interest rates as they see fit (at least until the Credit Card Act of 2009 goes into effect). This can result in high rates that are difficult if not impossible to manage.

Before we get to evaluating student credit cards, consider how long it would take to pay off a card balance by making the minimum payment. For example, a student with a credit card balance of $7,000 with an interest rate of 18.9% could make minimum monthly payments for 16 years before paying off the balance in full. The principal plus interest would equal $14,173, over twice the amount of the initial card balance.

How to Evaluate A Student Credit Card Offer

Evaluating a student credit card, or any credit card for that matter, is a fairly straight forward process. Federal law requires credit card issuers to provide consumers with the basic information they need to understand the terms and conditions of a credit card offer. This information is contained in what has become known as the Schumer Box. It is named after Senator Schumer from NY who introduced the legislation that requires card issuers to provide this information.

Here is what the Schumer Box looks like for the popular Discover Student Card (click image to enlarge):

The information provided in the Schumer Box is critical to evaluating a card offers, so let's look at each item:

• Annual Percentage Rate (APR) for Purchases: This represents the interest rate you'll be charged for purchases if you don't pay the balance off in full each month. As noted earlier, student credit cards tend to charge higher interest rates than many other cards. The Discover Student Credit Card currently has an APR of 14.99%. If there are any introductory rate offers, they will be listed here, too. The Discover card offers 0% on purchases for six months.
• Other APRs: Here you'll find the interest rate charged for transactions other than purchases. For the Discover card, it currently charges 23.99% for a cash advance and 29.99% if a cardholder defaults (by not paying on time, for example). Cash advance and default rates are always high, so avoid them at all costs.
• Variable Rate Information: Credit card interest rates can either be fixed or variable. A variable rate fluctuates based on some measure, like the prime rate. Almost all cards today carry variable rates. The Discover Student Card is variable, moving up or down based on the prime rate.
• Grace Period for Repayment of the Balance of Purchases: This tells you how long you have to pay your monthly balance in full to avoid finance charges. It's important to know this, and it varies from one credit card to another. Discover's grace period is 25 days.
• Method of Computing the Balance of Purchases: How the card company computes your daily balance will determine how much in finance charges you pay. Of course, pay off your card in full each month, and you won't have to worry about it. The thing to watch out for is something called double-cycle or two-cycle billing. Most cards have moved away from this method of computing the daily balance, and the Credit Card Act of 2009 outlaws double-cycle billing. Discover uses the average daily balance, which is now common among national credit cards.
• Foreign Currency Transaction Fee: This is important if you plan to travel outside the U.S. Discover charges a 2% fee for purchases made in a foreign currency. As convenient as a credit card can be, the 2% fee may make travelers checks a better option.
• Annual Fee: The annual fee is what you'll pay each year to carry the card. Most student cards do not charge an annual fee, and the Discover card is no exception.
• Minimum Finance Charge: Just about every card comes with a minimum finance charge, usually about $.50. This would kick in if you carry a very small balance, but for the most part, the minimum fianance charge is not a significant consideration when evaluating a credit card.
• Cash Advance Transaction Fee: Remember the high interest rate for cash advances we discussed a moment ago? Well credit card also hit you with a cash advance fee. For the Discover Student Credit Card, the fee is 3% of the amount of the cash advance, with a $5 minimum. This is typical among credit cards, and is another reason to avoid credit card cash advances.
• Late Fee: While you should work hard to avoid penalty fees, they are a reality for many credit card users. Here Discover lists the penalty fee for paying the credit card bill late,which is $19 to $39, depending on the balance on the card. This type of graduated penalty fee structure is becoming more and more common.
• Overlimit Fee: Likewise, the overlimit fee ranges from $15 to $39, again depending on the balance on the card.

As you'll, the Schumer Box tells you just about everything you need to know about the terms and conditions of a credit card. For this reason, it is important to review it carefully before applying for a student credit card. The Schumer Box can be found on any card issuer's website, usually on the application page.

Beyond the terms and conditions of a card, any rewards offered by the card should also be considered. The primary benefits offered by student credit cards are cash back, travel rewards, or points. Here are a few examples of the rewards available from a student credit card:

• Cash Back: Among student credit cards, the Discover card is perhaps best known for its cash back rewards. The card offers up to 5% cash back depending on certain purchases throughout the year, and 1% cash back on everything else. You can find more details about this card at www.discover.com.
• Points & Travel Rewards: Citi student credit cards are a top choice for those seeking points and travel reward. The Citi Forward Card for Students enables students to earn 6,000 ThankYou® Points after making $50 in purchases within the first 3 months, and another 5,000 bonus points for signing up for paperless statements in the first three months. In addition, cardholders earn 100 bonus points each month they pay their bill on time and stay under their credit limit. Cardholders also earn 5 points for every $1 spent on dining, books, movies and music, and 1 point for every $1 spent on all other purchases. You can find more information about the card at www.citi.com/student_forward.

  The Citi mtvU card takes a different approach to points and travel awards. Instead of paying 6,000 bonus points in the first three months, the mtvU card pays 2,000 bonus points twice a year for a good GPA. In addition, cardholders earn another 25 bonus points each montht that the bill is paid on time and the cardholder does not exceed the credit limit. You can find more information about the card at www.citi.com/mtvU.

• 0% Introductory Rates: Credit card issuers are also offering students 0% introductory rates on purchases and balance transfers. The typical offer lasts for 6 months, and as with most balance transfer offers, there is a transfer fee equal to 3% of the amount transferred. There are no fees for taking advantage of 0% on purchases, but care should be given not overspend; eventually the 0% offer expires and any outstanding balance will be subject to the card's regular APR.
  Each of the above cards offer these 0% introductory rates.

How to Manage and Use a Credit Card Responsibly

If you decide to get a student credit card, there are some basic money management tips that can help you stay out of financial trouble:

• Pay in full every month: Commit right from the start that you'll pay the balance in full every month. Of course, paying the balance in full takes more than just a commitment (see below), but good habits start with a promise to youself. With credit cards, make that promise from the start.
• Leave your card at home: If you don't need the card, leave it in a secure place when your out with friends. If you don't have your card, you won't succomb to temptation.
• Pay your credit card several times a month: Rather than waiting for your bill to arrive before paying it, log-in to your credit card account and pay the bill electronically several times a month. This will help you control your spending, and elliminate surprises at the end of the month when the credit card bill arives.
• Use mini-budgets: A great way to budget is to pick the one or two expenses where you tend to overspend, and set a budget for just those categories. For example, if eating out is your achilles' heal, set a budget just for that spending category and stick to it.
• Keep credit card rewards in perspective: While cash back, travel, and other credit card rewards, they should never be used to justify a purchase. Don't let the perks of a card cause you to overspend.
• Stop using the card if you accrue a balance: If you find yourself unable to pay your credit card bill in full one month, commit to shelving the card until the balance is paid off. If need be, give the card to a trusted friend or family member to hold while you pay off the balance.
• Consider credit card alternatives: If credit card debt starts to spiral out of control, consider cutting up the card and using one of several credit card alternatives (see below).

3 Alternatives to Student Credit Card

Credit cards aren’t the only convenient and widely-accepted payment methods available these days. Financial institutions have developed some unique alternatives that feature many of the same benefits that credit cards offer, but at the same time, the alternatives eliminate some of the dangers. There are ways to get many of the advantages of a student credit card without getting a credit card. Here are some of them:

1. Bank Debit Card: A bank debit card or ATM card is tied to your checking account. Each time the card is used, the amount of the transaction is automatically deducted from the linked checking account. While a debit card does not build credit history, it eliminates the need to carry cash and eliminates the possibility of overspending. Today, bank debit cards are part of the Visa or MasterCard network, so they can be used anywhere that accepts these credit cards. Bank debit cards also allows you to make purchases online, or from places that do not accept cash or check.
2. Charge Card: Charge cards, like American Express, are different from credit cards because they must be paid in full every month. This is one way to ensure that overspending doesn’t happen, and it is also another way to build credit history. Most students, however, would likely need a co-signor to qualify for a charge card.
3. Prepaid Cred Cards: With a prepaid card, there is no risk of exceeding limits or overspending. These cards work just like a regular credit card, only there is a set amount of money that must be deposited to the card in advance. Prepaid cards are very inexpensive to set up, and students or parents can even set up direct deposit into the account. There are monthly fees associated with prepaid credit cards, usually less than $10, but these are often waived if you have direct deposit

Final Thoughts on Student Credit Cards

The number one rule of financial management is: “Don’t spend money that you do not have.” While student credit cards offer convenience, security, and financial rewards, they also come with potential risk. It is critical for students to understand the many benefits and downfalls of credit cards before opening an account. And if you do get a student credit card, manage your money so that you can pay the card off in full every month. You'll build a solid credit history, enjoy credit card rewards, and avoid the high cost of finance charges.

Here are a few more articles you can explore for more information on credit cards:

• Credit Card Fees and Fine Print
• Credit Card Accountability, Responsibility and Disclosure Act | Do consumers really benefit?
• What Costs More–A Bounced Check, Credit Card Late Payment Penalty or Payday Loan
• Credit Card Debt--10 Lies That Cause Us To Charge It

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