Credit Card Offers for College Students

The topic of the previous blog was credit cards for undergraduate college students. My daughter who enters college this fall got 3 credit card offers: BB&T, Discover, and Capital One. From the offers it is apparent that she is considered a high financial risk by all 3 issuers, which is probably justified given her current level of income.

All 3 offers offer no annual fee and lots of other benefits.

Discover stated "Don't delay - start building your credit history today." Captital One stated "Keep in mind, we may increase your APR if you pay us late twice within 12 months."

These offers in the order of BB&T, Discover, & Capital One are presented below:

Annual Percentage Rate (APR) : It is a variable rate at the prime rate + ___% with a current rate of 17.9%, 16.99%, 19.8%.
Cash Advance APR: 24.15%, 23.99% with a default rate of 30.99%, 22.9% with a default rate of 24.9%.
Transaction fee for cash advance: 3% ($5 minimum), 3% ($5 minimum), 3% ($10 minimum).

Assuming a $500 credit limit here are the rest of the fees:

Late payment fee: $35, $39, $39
Over the credit limit fee: $35 and no overlimit paid, $39, $29.

For illustration sake lets use $35 for both the late payment fee and the over the credit limit fee.

Let's assume my daughter buys $350 worth of books and school supplies in a single transaction, probably a low amount. The first thing that happens is this amount is authorized and reserved by the issuer. Later the account is settled. The process of reserving and settling this account will essentially double book this account for a period and the credit card account will show a balance of $700.

For this $350 transaction and $35 fee will be assessed for the month. If the credit card is paid late another $35 fee is assessed. This single transaction can have $70 worth of fees. This is 20% of the transaction amount for a month and if this annualized by multiplying by 12 it becomes 240%. The account balance has now grown to $420+.

The largest potential problem with a credit card is with the fees, 240% annualized, not the APR of about 20%.

Just say NO to credit card offers for undergraduate college students.

Credit Cards and College Students

My daughter just graduated from high school and is preparing for college this fall where she will be a full time undergraduate student. Many are in this same situation.

The question we looked at was should she have a credit card? Here is the research we found in Volume 6 of the Journal of Personal Finance:

1. In 2003, credit cards are used by about 1/3rd of Americans age 18 and 19.
2. In 2004, one credit card is held by at least 70% of college students.
3. In 2001, 47% of undergraduate had 4 credit cards or more.
4. In 2001, 21% had balances between $3,0000 - $7,000.

I am sure these numbers have grown with time. Consequences for undergraduate students with credit card debt:

• Students feel forced to put jobs ahead of school to keep up with payments (notice not being able to pay off each month and having to make payments).
• Students who had an academic hearing often mentioned working multiple jobs to pay on debts as reasons for poor academic performance. The end result for some is dropping out of school, delaying graduate school, etc.
• This can lead to a poor credit rating and put the student in a more difficult financial position. The key justification given by a credit card issuer is "it is important for the student to establish a credit rating." Having a good credit rating is never stated.
• Having a poor credit rating leads to difficulty in obtaining future loans.

The bottom line is a credit card should be used by college student who has shown financial discipline. If financial discipline does not exist delay getting a credit card and use a debit card. A debit card is a good tool to teach financial discipline without having long term financial consequences.

My daughter went to a bank, with a branch in the town she is attending college, to open an account. The bank had a program for students that included a saving accounnt, checking account, debit card, and a credit card. She is now fully equipped to spend money.

What is she doing with this new found financial freedom? She is going to keep the debit card and cancel the credit card. The strategy is to use the debit card through undergraduate school and start using a credit card after graduation.

The next blog will show the 3 credit card offers and pitfalls of using any of these cards.