Credit Card Tips for College-Bound Students

Now is the time to talk with college students about credit cards. This will be the easiest time in their lives to get a credit card, but if they don't understand how to use a credit card, it is easy to run up large debt and make mistakes that will damage their credit for years.

Even though college students may not have a full-time job or a credit history, credit card issuers are eager to get credit cards in the hands of every student. "The issuers are glad to take on this risk, confident that in most cases parents will pay off outstanding balances when their student runs into problems," says Bill Hardekopf, CEO of Lowcards.com. "Since students will have easy access to credit cards, parents need to prepare their students for the temptation of credit cards ahead of time. They need to know that mistakes and bad decisions will not be forgiven by the issuer just because they didn't know better."

The summer before college starts is a good time to teach students about credit. "Parents should sit down with their kids and go over their own credit card bill. Explain about finance charges, grace periods and minimum payments. Explain about rotating balances and how much extra you will pay each year in interest charges if you only pay the minimum payment," says Hardekopf. "It is also a good idea to show them a copy of your credit report and the effect of credit cards and other debt on their credit score and future financial options."

Since most students will get a credit card during college, parents should help them compare and select the right card. Parents should set also set limits and consequences for running up credit card balances. According to statistics from Nellie Mae, 91% of final year students have a credit card compared to 42% of freshmen. 56% percent of final year students carry four or more cards while only 15% of freshmen carry that many. Final year students carry an average balance of $2,864 while freshmen carry an average balance of $1,585.

Good Rules for College Students Using Credit Cards.

* The most important ground rule for credit cards should be to only use them for emergencies, not for gas, food/groceries, or clothes. It is too easy to use the card for a quick meal or impulse purchase without considering the premium a high interest rate will add. According to Nellie Mae, 71% of undergraduates use their credit card to buy school supplies, textbooks and food.

* Pay off the balance each month. 21% of undergraduates with credit cards reported that they pay off all cards each month; 44% say they make more than the minimum payment but generally carry forward a balance; 11% say they make less than the minimum required payment each month (Nellie Mae).

* Avoid department store credit cards, especially at a time when it will be easy to get a standard MasterCard, Visa or American Express. Although a discount to a favorite store sounds like a good idea, store cards have the highest rates available.

* Avoid using credit cards for cash advances. The rates are extremely high.

* Get only one card and pay it off each month.

* Know your credit limit and look at it each month. The credit limit may be as low as $500.

* Pay your bill a week before the date it is due. Default rates also apply to college students. One late payment or exceed the credit limit and the rate will jump to approximately 30%.

Federal Reserve Study Defends the Methods Used by Credit Card Issuers

The Federal Reserve has just released a new study that affirms the solicitation and lending practices of credit card issuers. The study is part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 that requires the Federal Reserve to report to Congress about the methods used by credit card issuers, and to determine if the industry's practices encourage consumers to accumulate additional debt. The review found that credit card issuers adequately assess the customer's risk, ability, and willingness to pay before offering credit.

The study offers interesting statistics about household debt:

* Households with credit cards have increased from 16% in 1970, to 71% in 2004.

* 46.2% of all households carry a credit card balance.

* 76.4% of all households have any type of debt. Most households carry debt regardless of age, race, ethnicity, net worth and work-force status.

* 8.9% of all families have a payment past due (60 days or more on any debt). 13.8% of families with an annual income of $20,000-$39,900 have a payment past due.


How Issuers Determine Credit Card Offers

The report says that issuers have become sophisticated with their process to forecast the ability and willingness of borrowers to repay their debts. Using detailed information from credit reporting agencies and proprietary databases, issuers use quantitative modeling to help them decide who they will extend credit to and what the price will be. Potential borrowers are ranked on the basis of historical information about borrowers with similar quantifiable characteristics. The Federal Reserve says these scoring models can "enable an efficient review of large numbers of customers, and form the basis of most credit decisions in the credit card industry."

The variety of card offers not only provides choices for consumers, but they allow the creditor to create products and incentives for specific segments of the market and to price them in a way that reflects the underlying risk of each segment.

While it seems that credit card issuers send offers to anyone with a mailbox, the issuers actually prescreen who they send solicitations to. They establish specific criteria such as credit score or account usage (number or credit cards already held and outstanding balances). Credit scoring agencies help provide information on customers in their database who meet the criteria. Prescreening allows creditors
to avoid the cost of sending solicitations to large numbers of consumers who would not qualify for the products offered.

Issuers use a number of factors during the application process, including credit history, debt burden, employment and income status, length of employment, and mortgage or rental history.They use this information to calculate debt to income rations to predict the consumer's ability to pay.

The study also described "work out" or "forbearance programs" which helps cardholders meet contractual obligations while minimizing credit loss to issuers. Despite the money made from interest, the issuers do want to receive the principal over a reasonable period of time, typically sixty months. The report says that "to meet these time frames, institutions may sometimes need to substantially reduce
or eliminate the interest rate or the fees so that more of the payment is applied to reduce the principal. In addition, institutions sometimes negotiate settlement agreements with borrowers who are unable to service their unsecured open-end credit."

The study also shows that while direct mail solicitations is the industry's most effective method for generating new accounts, it is not as effective as it used to be. In 2004, 5.23 billion solicitations were mailed, but the response rate was .4%, a record low.

"Even though the response rate is dropping, don't expect an end to the solicitations in your mailbox. 70% of the new accounts come from direct mail," says Bill Hardekopf, CEO of LowCards.com.