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.