Credit cards issued to students will work the same way as credit cards issued to anyone else. In other words, interest will be charged on any unpaid balance on the credit card, each month, until the balance is paid. The rate charged will be determined by the credit card issuer and subject to change according to the terms of the credit card holder agreement.
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Current credit card interest rates average between 13 and 21% nationwide, so revolving credit card balances can quickly increase, causing students to max out their typically small credit lines.
Worse still is the idea of cash strapped students making only minimum payments on their credit cards. An average credit card balance of a few thousand dollars can take 10, 15, or even 20 years to pay off if only minimum payments are made, and even if the credit card is never used again!
Aren’t there some legal protections for students?
Yes! Legislation passed by Congress in 2009 contained several provisions designed to protect college students from the unfair business practices of many credit card companies. In the past, credit card offers were routinely extended to students with little or no visible means of support.
Credit card companies used to aggressively market on college campuses, providing students with gifts and other promotional goods and services to entice students to apply for more and more credit cards.
How have these practices changed?
With the passage of the Credit Card Act of 2009, these practices are now prohibited. In addition to limiting marketing on college campuses, credit card companies are now required to qualify students before approving them for new credit cards.
If a student doesn’t qualify for a credit card in the usual manner, he or she may obtain a qualified credit card account holder or co-signer who will be equally responsible for the outstanding credit card debt.
The Act also places restrictions on colleges and universities, requiring them to publicly report dealings with credit card issuers that result in marketing agreements. The new laws also apply to alumni associations, which, while not official parts of a university community, often contract with credit card issuers to provide services to their general membership.
An article from the February 2010 issue of Inside Higher Ed explores the ins and outs of the new laws and how the Credit Card Act of 2009 affected college campuses across the country.
Are student credit cards a good idea?
Many have wondered if students and credit cards are a good mix. Even after the changes imposed by the Credit Card Act of 2009, many students are still using credit cards to cover shortfalls in financial aid, employment, and other revenue streams.
When scholarships, grants, and bank loans run out, many students have been forced to use credit cards to cover books, materials and supplies as well as their other day-to-day living expenses.
What students often don’t remember is that balances on credit cards are in fact loans. How students using credit cards manage these loans, among their other financial obligations, can have a lasting impact on their future.
How widespread is credit card use among students?
A May 2011 report by U.S. News and World Report, examines possible outcomes from increased credit card usage by American students.
In 2009, student loan giant Sallie Mae found that 92% of undergraduate students used credit cards for at least some college expenses. By the time they reached graduation, 20% of seniors had amassed credit card balances in excess of $7,000!
If students are going to use credit, the U.S. News article had some helpful tips and reminders including the following:
First, credit cards are expensive. By definition, credit cards are revolving debts, which accumulate interest charges upon interest charges and take a long time to pay off, if the users are making only small incremental payments.
U.S. News says if you must use credit cards, try to pay the balances off each month.
It’s never too early to worry about a credit score, especially when considering future employment or renting a first apartment. Remember, your bad credit history can be an obstruction to anything that requires a background check, such as a new job or a license application in your chosen field.
Students should investigate all available options for financing college expenses including education loans, grants, work study programs, etc., before turning to credit cards.