Major Changes Ahead for Student Credit Cards

The Credit CARD Act will take effect in two weeks and one of the major provisions is the restriction on marketing credit cards to young adults under 21.

"Right now, it is easier for a college student to get a credit card than to get up for class. College students use credit cards to pay for everything, just like their parents. Once this new law takes effect, many college students will have difficulty getting a credit card," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

Beginning February 22, issuers are not able to offer free merchandise to lure students to sign up for a credit card on college campuses, at college sponsored events (like sporting events) or within 1,000 feet of the campus. In addition, the CARD Act bans credit cards to people under 21 unless there is an adult co-signer or the young adult can show proof they have the income to pay the debt.

"The regulations leave 'sufficient income' open to interpretation. Some issuers will just want to know that your monthly income is more than your minimum payment due. However, students need to assess their own situation. If you are struggling to pay for your own food, housing, transportation and education bills, you can't afford to carry a balance on a credit card," says Hardekopf.

Credit lines will also start out low. If there is no co-signer, credit lines will be $500 or 20 percent of the student's annual income. If the student has more than one card, the credit line from all credit cards will be up to 30 percent of the annual income.

College is a good time for students to learn how to correctly use credit cards and build up their credit score. However, many students are unprepared for the responsibility.

A 2009 Sallie Mae study showed that college students used credit cards more than ever before. 84% of college students have at least one credit card, up from 76% in 2004. The average amount of debt carried by college cardholders is $3,173 which represents a 46% increase over the 2004 figure of $2,169. The average student has 4.6 credit cards.

Only 17% of college students pay off their entire balance each month and 1% had parents or other family members paying the whole balance. The remaining 82% carried balances and paid finance charges each month.

Parents must educate their students about using a credit card. One-third of students rarely or never discussed credit card use with parents, and nearly all undergraduates would like more information on financial management topics.

"Parents can make the co-signing for a credit card a very teachable moment. Tell your student how to deal with credit cards and the pitfalls that exist. Explain how to read the monthly bill and how important it is to pay the balance in full at the end of each month. Give them real-life examples of the credit card mistakes you have made so they can avoid making the same mistakes," says Hardekopf.

Options for Credit for College Students

1. Co-sign.
The student can apply for a card with an adult co-signer. If the student is unable to pay off the account, the credit card issuer will demand that you pay off that debt in full.

The loan will be reported on the student's credit report. If it is paid on time and more than the minimum, it will help increase credit scores. However, adding your name to someone else's debt is a very serious financial step because this mixes your credit record to your child's. If either the student or parent defaults, mistakes become community property and everyone suffers because the co-signer has committed to
make good on this account. Delinquencies will show up on both credit reports. The only way to get your name off of the loan is to pay off the loan.

As a cosigner, your liability for the loan may keep you from getting other credit because creditors will consider the cosigned loan as one of your obligations.


2. Authorized user.
This is almost like an apprenticeship to teach your student how to use a credit card. You give your student authorized permission to use your credit card by adding him/her to the account. The student can receive and use a card with his/her name on it without being legally responsible for repaying the credit card balance.

The account is considered the same for credit scoring as if it were owned by the authorized user. If you have a good credit score, your student will benefit from that. However, if you have a couple of late payments or get into trouble, this will also affect the authorized user. Authorized users can be removed with a letter or phone call to your issuer.


3. Open a Checking Account with a Debit Card.
A checking account with a debit card is a good first step toward learning how to manage credit. While debit cards have their own fees and downfalls, college students can get into far less trouble paying a $30 overdraft fee than running up a significant credit card balance and it does not pull down your credit score.


4. Prepaid cards
Opening a prepaid card may be the easiest option for students, but their fees are higher. Make sure the card reports payment activity to credit bureaus (many secured and prepaid cards do not). AccountNow prepaid Visa reports to all three agencies. The
processing fee is $19.95, the monthly fee is $4.95 and there is a $0.50 transaction fee per transaction.


"Prohibiting promotional offers and marketing on campus will be help reduce impulse applications. If your student is qualified to apply for a credit card, help them research credit card offers to find the best card with the lowest rate. Use the Terms and Conditions to compare cards and to explain the fine print," says Hardekopf.

Transferring a Credit Card Balance--A Good Idea?

Balance transfers have been popular among credit cardholders for a number of years. More consumers are now considering a balance transfer due to the rising interest rates on their existing cards. But is this a good idea?

If you have good credit and your credit card APR is currently above 20%, this is the time to consider transferring your balance to a card with a lower rate. As we saw in 2009, balance transfer fees are increasing and the introductory periods on these offers are decreasing. This trend is likely to continue in 2010.

"Balance transfers are a good illustration of the changes in the credit card industry. Issuers once used balance transfer offers to lure cardholders from other issuers; they were eager to accept any application because any growth was good. The loans were cheap and easy with 0% for at least twelve months and no balance transfer fee. These loans were so easy to get that some cardholders transferred their balance from card to card at the end of each introductory period, never paying interest on their credit card debt," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "Several years ago, issuers added a 3% balance transfer fee, with a $50 or $75 cap. Then the cap was dropped. 3% was the standard fee until some issuers began raising it last year in an attempt to increase revenues in any way they could."

Here are the current balance transfer fees by issuer:

* Chase: 5%

* Discover: 5%

* Bank of America: 4%

* Citi: 3%

* American Express: 3%

* Capital One: most do not have balance transfer fee, but the Platinum
Prestige card charges 3%

"The CARD Act does not restrict balance transfer fees. It would not be
surprising to see further increases in the balance transfer fees this year,"
says Hardekopf.

Issuers learned a lesson from the lending meltdown that helped bring the record-setting defaults that are still dragging down credit card revenue. Today, credit card default rates exceed 10% for some issuers. This makes issuers even more sensitive to risk and they are taking strong measures to avoid it. They have sliced credit limits and limited the terms of balance transfer offers to reduce risk. In the eyes of the issuer, cardholders who need a balance transfer the most are likely in a higher risk category and could have a greater probability of default.


Who Should Apply for A Balance Transfer Card?

Start with your credit score because issuers will use this to determine your credit limit, interest rate, and length of the introductory period. If you have excellent credit (a FICO score of 740) and your APR is over 15%, you should consider transferring your balance to a card with a lower interest rate.

If your credit card rates are high because your credit score is low, it is unlikely that you will receive the offer that you need, so you must have realistic expectations. You will not receive the lowest advertised rate and your introductory period may only be three to six months. Your credit limit may be less than the amount that you requested and you may not be able to transfer your total balance. Use the average limit of your other cards to estimate the credit limit for a new card. Balance transfers may be limited to a portion of your credit limit.

"Before a consumer transfers a balance from one card to another, one should do the math to see if the amount of interest payments that you save via the introductory offer outweighs the balance transfer fee that has to be paid immediately. Be sure to factor in the ongoing APR if you are not able to pay off the entire balance during the introductory period," says Hardekopf.

If the offer you receive does not meet your needs, decline the card. Limit the number of applications because multiple credit applications are a red flag on your credit report and can lower your credit score.


Which Card Should You Apply For?

The length of time it will take to pay down your debt should determine the cards you compare for balance transfers. If it will take you more than a year to pay off your balance, look for a card with a low ongoing low interest rate because a low APR for the long-term is likely to be more important than the length of the introductory period.

If you can pay off your balance in less than a year, apply for a card with 0% for 12 months for balance transfers. With a 0% loan, you will pay off your balance much faster if your total payment is applied to the balance. You will also save yourself money in interest payments

The best cards for balance transfers are the ones that offer an introductory period of twelve months for balance transfers and a low ongoing APR. Pay attention to what transactions are included in the introductory offer. Some offer 0% for 12 months on purchases, but not balance transfers; similarly, other cards may not include the 0% on any purchases.

Avoid cards with high interest rates, even if they offer generous rewards. Since you carry a balance, paying off your debt as fast as you can at the lowest interest rate is the only factor you should use to compare credit cards. Most credit card issuers do not give you points for balance transfers.


The Fine Print

* You must pay on time, every time. If you have a late payment, your introductory period will likely end and you will be assessed the APR on the transferred balance.

* There is no grace period with balance transfers. Interest charges begin at the time the check is issued to your credit card institution.

* You can't transfer your balance to another card with the same issuer.

* It takes about four weeks for the balance to be transferred. Continue to make all required payments until you confirm that the balance transfers were made. Multiple balance transfers will process in the order they are requested on the application.

* The new issuer pays the amount of the balance directly to the old issuer and the amount you owe them will be reduced by the amount you transferred. The available credit on your new account will be reduced, as if you had made a purchase.

* Transferring a balance does not automatically close your old account. If you want to close the account, contact the issuer directly.

* Issuers have the right to decline balance transfer requests or transfer less than you requested.


"After you transfer a balance, stop using the old card. If you use both cards for spending, you could soon have large balances on both cards and get yourself deeper in debt that you were before," says Hardekopf.

CARD Act--Major Provisions One Month Away

The major provisions of the CARD Act take effect on February 22, one month from tomorrow.

"The CARD Act made some very beneficial changes for credit cardholders. Consumers have been wanting these strong protections for years and they will become real in one month," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "However, the industry landscape has changed dramatically since May when the CARD Act was finally signed. Issuers have reacted to a very rough economy and this new law by finding new ways to increase their revenue. They have raised interest rates, closed accounts, increased fees and decreased reward programs. It is likely that the number of people who have been negatively affected by these new changes outnumber the people that significantly benefitted from the CARD Act."

Here are the major provisions of the CARD Act that go into effect on
February 22:

1) There will be new rules for interest rates. Issuers cannot increase rates during the first 12 months of a new account. On existing accounts, if your rate is increased, the new APR only applies to your new purchases; your existing balance is still charged the old interest rate. (There are some exceptions on both of these provisions: if the card has a variable rate and the index goes up; if the introductory period ends and the rate increases to the standard rate; the payment is more than 60 days late; payments fall behind in the debt management plan.) Any monthly payments above the minimum amount must be applied to the balance with the highest APR first.


2) There will be protections for underage consumers. If you are under 21, you will have to prove that you are able to make payments, or you will need a cosigner, in order to open a credit card account. Issuers are also prohibited from offering free gifts to these young adults as inducements for signing up for a credit card.


3) Over-the-limit fees are banned unless consumers give issuers permission to allow the transactions that put you over your credit limit. If consumers do not "opt in", then issuers cannot charge you this fee and your transaction may not go through.


4) Your statement must clearly explain how long it will take to pay your balance if you only make minimum payments. It must also tell you how much you need to pay each month in order to eliminate your balance in three years.

"This is one of the best provisions of the bill. It is too easy to pay your minimum amount without calculating how much more you need to pay to get out of this debt. Now the reality of how much you are paying in interest will be clearly stated. Hopefully, this will be an incentive for cardholders to pay more of their balance each month," says Hardekopf.


5) There will be caps on high-fee cards. If your credit card company requires you to pay fees (such as an annual fee, processing fee or application fee), those fees cannot total more than 25% of the initial credit limit. This limit does not apply to penalty fees such as penalties for late payments.


6) There will be changes and standardizations for billing and payments. Your due date should be the same date each month and the payment cut-off time must be 5 p.m. or later on the due date. If your due date is on a weekend or holiday when the company does not process payments, you will have until the following business day to pay.


7) Two-cycle billing will be eliminated. Credit card companies can only impose interest charges on balances in the current billing cycle.


8) Universal default is now prohibited. Issuers can no longer increase a cardholder's APR based on their payment records with unrelated accounts, like a utility bill.


In addition to these provisions, there are several rules that went into effect on August 22, 2009:

1) Your issuer must send your credit card bill at least 21 days (rather than 14 days) before your payment is due.

2) Your credit card company must give you 45 days notice (rather than 15 days) when they plan to increase your interest rate or certain fees (annual fee, cash advance fee, late fee).

3) If an issuer increases your interest rate, you have the right to "opt out" of that increase. You can no longer make any new purchases with that card, but you can continue to pay off your balance at the existing (lower) interest rate for up to five years.


"We have lived with the politics and consequences of this bill for almost two years. It will be interesting to see if these new provisions are helpful for consumers or if the higher rates and fees are the only lasting changes from the CARD Act," says Hardekopf.

One positive sign from the economic downturn of the past year is that consumers finally began paying down their credit card debt.

In November, Equifax reported that credit card debt had declined 7.3% from a year ago. The latest Federal Reserve Consumer Credit report reveals that credit card debt fell in November for the 14th consecutive month. Revolving credit, the majority of which is credit card debt, has fallen over $100 billion since October of 2008, from $976.1 billion to $874.0 billion.

A number of factors could be contributing to this trend. Millions of consumers have lost their jobs or experienced a significant decline in their income. But there also seems to be widespread consumer outrage with the changes made by credit card issuers. 2009 was a year full of interest rate increases, credit limit decreases, and tightened credit by issuers. These were strong incentives for cardholders to cut back on their credit card usage and pay down their balance.

"Issuers began making these changes in 2008 and we expect them to continue in 2010. Even though the CARD Act will help stabilize some rate increases, many cardholders are already stuck with very high rates," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "The only way to protect yourself against these high rates is to pay off your balance."

Here are some consumer tips to reducing your personal debt in 2010:

1. Accept that paying off debt won't be easy. It took you a while to get into debt, and it will probably take you longer to get out. Do not get discouraged, no matter how much you can pay off or how long it takes.

2. Start with researching how much you really owe. If you only pay the minimum balance, it is easy to focus on that number and lose track of the total balance. Collect each of your bills with outstanding debts including all credit cards, mortgage, student loans, auto loans, personal loans, and bank loans. Create a summary sheet that lists the creditor, monthly payment, balance, interest rate, and credit limit for each. List the status of each account, if any bills are past due, and verify the payment due dates.

3. This debt summary may be overwhelming, so prioritize which bills to pay first. If money is short and you can't pay all of your monthly bills, first pay the bills that are a necessity for health, shelter, basic groceries, and basic transportation. Then pay the secured loans such as your car loan. Payments on unsecured loans, such as most credit cards, should come last in these critical situations.

4. Contact your creditors to negotiate lower rates. The less money you pay in interest, the more money you have to pay off your bills. You may also want to shop around for a mortgage or credit card with a lower rate.

If you are in danger of missing a payment, contact your creditors as soon as you realize you have a problem. They may be able to help you work out a payment plan, lower your rate, or lower your monthly payment. Credit card loan defaults are 10% or more for some issuers.

If the first person you speak with can't help lower your rate or make adjustments to your account, politely ask to speak with a supervisor or someone who can. Persistence may be necessary to find the person who can or will help you. Explain that you are in debt, the steps you are taking to repay it, and what you can pay today. Document all conversations, including whom you spoke with, and the date, time, and the results. If this doesn't work, contact the National Foundation for Credit Counseling to work out a debt management plan.

5. If you have multiple credit cards with outstanding balances, focus on paying off the card with the highest interest rate first. Continue to pay the minimum on your other cards until the card with the highest rate is paid off, then focus your effort on the card next in line. Don't close all cards that you pay off. Keep your oldest cards open and occasionally use them to buy a magazine or a movie ticket--just pay it off each month. This will help improve your credit score.

6. Pay more than your minimum payment. Your minimum payment is usually only 2%-5% of your balance. At this rate, it will take you many years to pay off your debt. Pick your card to pay off and try to double the minimum payment. Soon your credit card bill will include these calculations.

7. Check into transferring your balance to a lower rate card. If your rate is above 15%, it could pay off to transfer the balance for that card to one that offers 0% for 12 months for balance transfers. However, this is not the "no interest for a year" loan it used to be. Issuers have tightened their balance transfer offers and you will have search to find and issuer that offers for 0% for 12 months. Citi Platinum Select currently offers 0% for up to 12 months. Most balance transfer offers have been reduced to six months.

To take full advantage of this 0% interest, pay as much as you can above the monthly minimum. Be aware that credit limits are shrinking and you may receive a smaller credit limit for your balance transfer. Only use this card for the balance transfer, not additional purchases.

Pay attention to the balance transfer fee. At the beginning of 2009, the industry standard for a balance transfer fee was 3%. But some issuers increased that fee during the year. In June, Bank of America increased the balance transfer fee to 4% and Discover now charges 5%.

8. If you have a credit card balance, stop using it for anything other than necessities. Use cash instead. Credit cards are convenient, but if you carry a balance, you are still paying interest for dinners, clothes, entertainment and things that are long gone. If your APR is 15%, ask yourself if the purchase is worth paying an additional 15% in interest per year. If you use cash, you will not only save money on interest, but also reduce the amount you spend. According to a Dun & Bradstreet report, shoppers spend 12% to 18% less when using cash.

9. Pay your bills on time, every time. Late payments can cause declines in your credit score. If you are 30 days late on your credit card payment, you could lose 60 to 110 points, depending on your credit score. The higher your credit score, the more points you will lose.

10. If you are surprised by your current rates, check your credit report. It may contain an error that is creating a lower credit score and higher interest rates for you. If you find an error on your credit report, contact the credit bureau to report it. They must respond to your claim in thirty days or remove the information that is incorrect or can't be verified. You can make your dispute by mail, telephone, or online. If the corrected error results in a higher credit score, contact your creditors to make sure they know about your improved score, and ask for a lower interest rate.

11. The good news. If you build a history of paying your bills on time every time, and start paying down your debt, not only will your debt decrease, but your credit score will increase. As your credit score increases, contact your issuers to ask for lower rates.

Consumer Tips for Applying for A Credit Card

January is historically the busiest month for credit card applications. Consumers are inspired by New Year's resolutions to save money or find themselves trying to repair the damage done by holiday shopping.

Before applying for a credit card, consumers should do an internal audit on their financial situation and then thoroughly compare credit card offers instead of applying for the first offer that comes in the mail.

"Shopping for a credit card can be overwhelming since there are over 1,000 credit cards on the market," says Bill Hardekopf, CEO of LowCards.com, home of the Internet's only Complete Credit Card Index. "If you don't have a plan, it is easy to just pick a card because it has a familiar name or the advertised features sound attractive. You want to pick the right card. If it doesn't fit, credit cards don't have a free return policy. Every time you apply for a card, it is reported on your credit score and too many applications can pull down your score."

Start by checking your credit score to understand how lenders will judge you. Also, this will enable you to check the accuracy of the report to make sure you are not being penalized unfairly. Checking your score may help you estimate the interest rate you may receive.

Then, classify yourself. Credit cardholders fall into four categories: those who pay the full balance each month, those who carry a balance all the time, those who want to transfer their balance to a lower rate, and those with either no credit or marginal credit.

The type of customer you are dictates how you shop for a credit card.


1) If you pay the full balance each month...

If you pay off your balance each month, the interest rate is not that important. You can make the credit card work for you and earn free rewards or cash. There are reward programs for practically every hobby or interest, so apply for a card that has the best reward program that fits your needs.

Finding the best reward card can be difficult since the offers are often hard to compare. To simplify, assume that the average reward program pays you 1% of what you spend. If the card offers you more than 1% of what you spend, it is an above average offer. Very few cards offer cashback rewards over 1%. The ones that do have a minimum spending limit you must reach to receive the higher rate, or it is part of a rotating reward program and the categories change every quarter.

When choosing a reward card, first look at your annual credit card usage. If you charge less than $5,000 a year, your best option is a general reward card, such as Blue from American Express. You can select rewards on lower levels like gift cards, restaurants and retail stores. If you have an airline reward card and charge $5,000 or less each year, you may need five years to earn a free ticket (most cards offer a free, domestic airline ticket for 25,000 points). If your usage is more than $50,000 per year, look for a card with unlimited rewards since some cards cap rewards at $50,000.

Hotel reward cards sometimes offer the most generous point distribution for everyday purchases, general purchases, and bonus points. Starwood American Express offers 10,000 points (three free nights at some hotels) with first purchase plus an additional 15,000 Starpoints if you spend $15,000 in six months. Some hotel cards also redeem points for airline tickets or retailer gift cards.

Now is the time to take advantage of cards that do not charge an annual fee and to use reward points as you earn them. Rewards aren't covered under the CARD Act and issuers can make changes or place restrictions on them at any time. Rewards are an easy area for struggling issuers to cut costs and add fees.


2) If you carry a balance...

The average credit card rate is 13.25%. If your credit score is above 720 and your APR is over 15%, apply for a card with a lower rate. If you have good to average credit, you won't get approved at the lowest advertised rate. Look at the rate tiers in the terms and conditions to judge what rate you may actually receive and to determine whether it will be worth the effort to apply.

This group of cardholders has been the hardest hit by issuers reacting to the tight credit market and the provisions of the CARD Act. In 2009, issuers increased rates for many cardholders that carried a balance to as high as 29.99%. Issuers also switched rates from fixed to variable.

"Issuers once competed aggressively to attract consumers that carried a credit card balance. Now they are raising rates, slicing credit limits, and even closing accounts for this same group. Issuers have been burned by high default and delinquency rates, and any significant outstanding balance now waves a huge red flag of risk" says Hardekopf.


3) If you want to transfer a balance to get a lower rate...

Ideally, balance transfers help you shift your balance from a high interest rate card to one with a lower rate. This used to be so easy that cardholders transferred their balance from card to card to take advantage of the intro period and avoid interest payments. Issuers allowed this and did not even charge a fee for balance transfers.

Today, balance transfer options are still available but they aren't as easy and welcoming as they used to be. Many introductory periods have been cut from twelve to six months, the ongoing interest rates are higher, and some issuers have increased the balance transfer fee from 3% to 4% or, in some cases, even 5%. Citi Platinum Select offers a 0% for up to twelve months for balance transfers with a 3% balance transfer fee.

It is important for consumers to mathematically calculate whether a balance transfer makes financial sense. Compare the up front balance transfer fee (which is then rolled into your balance) and what you will save in interest payments for the introductory period to the interest payments you will make on your existing card. Carefully read the terms and conditions of the card you are considering to see if purchases made during the introductory period are covered at the introductory rate or if that rate only applies to the transferred balance.

"If you have average credit, there is no quick fix to get a lower rate. Issuers have tightened lending and approval rates to this group. The best way to lower your rate is to raise your credit score. That will take time, but it will be worth the effort," says Hardekopf. "Ironically, one of the fastest ways to pull up your credit score is to pay down your debt and reduce your credit utilization ratio."


4) If you have no credit or bad credit...

Secured cards are for those who have no credit or a bad credit history and can't get a traditional credit card. This card may also be an option for those who have a completed bankruptcy. Think of a secured card as a short-term band-aid to repair your credit. If used correctly, a good payment history with the secured card should improve your credit score enough to qualify for a standard card in twelve months to two years.

The secured card looks like a traditional credit card--a merchant will not know it is a secured card. The difference between the secured and unsecured card is the higher rate and fees for the secured card. You must make the monthly payments on the card or the bank will turn the account over to collections, further damaging your credit score.

The deposit for a secured card determines the credit limit. If your deposit is $300, you will receive a Visa or MasterCard with a credit limit up to $300. The security deposit is not used to pay for charges but to cover the balance if the account is closed. The deposit is held until the account is closed.

A secured card has certain requirements. You must have a telephone in your home, reside in the United States, and have a valid social security number. While many applications are accepted, you are not guaranteed to receive a card. Unpaid tax liens or undischarged bankruptcies may prevent you from getting the card. Some issuers will not offer you a card if you have declared bankruptcy in the past.

Make sure that the issuer of the secured card you are applying for reports to the credit bureaus. This is necessary to help rebuild your credit history. If the issuer doesn't report your history, a good payment record will not positively affect your credit score. Some cards require an additional fee for this. Save yourself some money and choose a card that doesn't require this fee but still reports to credit bureaus.

Paying your bill on time can result in your account being upgraded to an unsecured card within two years. Some cards may also increase the credit limit to more than the amount of your deposit. After twelve months of good payment history, contact the issuer about converting your secured card to an unsecured card with a lower rate and a deposit refund.


"Once you have determined the type of credit card customer you are, compare all the cards in that category. Don't just look at the advertised slogans or features. Dive into the terms and conditions of each card. Make a grid of the rates, fees and rewards of each card so you can compare apples to apples and make an informed decision on the right card for you," says Hardekopf.