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Paying on time deters high credit card debt

April 26, 2006

Henry Chan | Lariat Staff The average college student owes $3,000 on credit cards, according to Dr. Franklin Potts, associate professor of finance. Potts warned students not to charge more than they can pay.

by KATY MATLOCK,
staff writer

Every semester the offers come. Credit card companies tout airline miles, cash-back rewards and low interest rates. College students have even been offered free sandwiches in return for signing up for a credit card. Even the Baylor Alumni Association offers credit cards to upperclassmen and alumni.

The cards have become pervasive in society. But what are the pros and cons of credit cards, and what do credit card companies know that many college students don't?

Dr. Franklin Potts, associate professor of finance, discusses issues surrounding credit cards in his personal finance class.

Potts' basic rule for college students and credit cards: "Don't charge more than you can afford to pay."

The average college student owes $3,000 on credit cards, Potts said, but he has seen much worse.

At one point, a student in his class approached him after learning that she owed $15,000 on her credit cards. At Potts' suggestion, the students' parents took out a home equity loan and paid back the debt at a much lower interest rate than the credit card company was charging.

Once a consumer gets behind in the payments, it doesn't take long to become hopelessly mired in debt, Potts said.

Credit card companies have several sneaky ways to catch consumers, he said.

One of these methods is the universal default clause. This clause allows the credit card company to raise a consumer's rates if the consumer pays a bill late -- to any company.

About 45 percent of credit card companies have this clause, Potts said.

Companies also can look for late payments in a consumer's credit history up to 11 months before the company issued the card, and justify raising the interest rate.

The Office of the Comptroller of the Currency, the government department that regulates national banks, specifically addressed this issue in a letter to the chief executive officers of all national banks. The letter said the act can be unfair or deceptive.

The office also described a practice Potts called "the bait and switch." This occurs when companies provide teaser rates that only apply for a few months after the promotion.

The rates can double or triple after the promotional period expires.

Another aspect of low advertised rates is that they often only apply to consumers with above-average credit scores, Potts said.

Credit card companies don't rely only on interest rates to make money, though, Potts said. Fees can be just as difficult to avoid and just as tricky, he said. These fees include late fees, transfer fees and over-the-line fees.

The late fee can be the most difficult to avoid. The fee applies based on the day the company posts the payment to the account, not the day the consumer mails the check, Potts said.

Transfer fees are applied to consumers when they transfer money from or into their credit card account.

Over-the-line fees apply when consumers charge beyond their credit limit.

Credits cards can be tremendously convenient when used with discipline, Potts said.

The best way to avoid falling to credit card marketing is by being an informed consumer, Potts said. He said students shouldn't be afraid to negotiate with credit card companies.

"Credit card companies want your business," he said. Threatening to take it away can be great leverage for negotiations, he said.

Junior Kyle Campbell of Corpus Christi said he uses his credit card for online purchases.

"It's really useful for that," he said.

Campbell said his parents helped him set up the account, but he began paying the bill when he started working.

He said he pays the entire bill each month. This was also advice Campbell offered to fellow students.

"Just pay it regularly," he said. "And don't charge more than you actually have."

Campbell said he is only slightly concerned about some of the dangers of credit cards, such as identity theft and credit card debt.

Many of the large credit card companies offer cards specifically designed for students.

The Baylor Alumni Association's credit card, offered through a partnership with U.S. Bank, is designed specifically with alumni in mind, but is also available to juniors and seniors.

"We hope that it is a way in which students (along with their parents) can help begin to learn about responsible finances," said Jeff Kilgore, executive vice president of the Baylor Alumni Association.

Kilgore said the association does not market the card to freshmen and sophomores because the program is more about helping students prepare for graduation. The credit card program is more of an alumni education program, Kilgore said.

"We are very careful about sending the wrong message with this program and do not want to, in any way, encourage irresponsible spending," he said.

One Baylor junior said her parents gave her a credit card when she turned 16.

The student's mother requested that she and her daughter remain anonymous due to the student's recent experience with identity theft.

Someone stole her credit card number in mid-February. The low credit limit on the card and the credit card company's theft monitoring system helped prevent excessive damage from the theft, the student's mother said. In spite of this risk, she said she believes the credit card's pros offset its cons.

"(My parents) just gave it to me because it's always good to have emergency money, and it sets up a good credit history for me," the student said.

Her mother said the card came with stipulations on spending. It was only to be used for buying gas or in an emergency situation.

The worst aspect of the card is how easily the number can be stolen, she said.

She said the main advantage is knowing that her daughter can always buy gas and will have money in an emergency.

"As a mom, that peace of mind outweighs those little scary things," she said.

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