College students and personal finance, Part 1: Credit-card debt

Editor's note: As the new college year revs up, Consumer Reports Money Blog devotes several days to the personal finance issues of college students. Today, we address some aspects of credit-card debt. In the days that follow, we'll feature the musings of several of our college-age summer interns on what they've learned about personal finance since leaving the nest.

Among the new credit card reform rules that kick in as of February 2010 are two provisions designed to help keep the under-21 crowd from getting themselves in over their head with credit card debt. 

It’s a growing problem,  especially on college campuses. Currently, 84 percent of college undergraduates have at least one credit card,  while  more than half carry four or more, according to the most recent survey by Sallie Mae, a leading originator of federally-insured student loans.

The average balance students carry is $3,173–higher than in any previous studies. Only 17 percent of students pay off balances each month, with the majority paying interest rates averaging 14 percent on their mounting debt load.

The new credit card reform rules will regulate aggressive marketing of credit cards to college students,  which have included offers of free T-shirts or I-Pods to lure them to sign up.  And as of February, under-21 consumers won’t be able to get a card unless they either have a co-signer or can document their ability to repay card debt.           

While building a good credit history is a smart move for students, the best way to do that is to shop for a credit card with no annual fee and use it to charge a recurring expense,  paying off the card bill on time and in full each month.

But be wary of pre-paid cards that may be marketed to students and others with a skimpy or poor credit history because this kind of plastic is likely to only get them in more hot water,  according to a new report from Consumers Union (click here to link). 

The report points out that consumers can end up paying a mountain of costly fees with pre-paid cards,  which are reloadable cards that usually carry Visa,  MasterCard or Discover logos and are marketed with slogans such as “The Checking Account alternative that lets you borrow money and builds credit.”–Andrea Rock 

            

            

Comments

[Tom]

While I'm all about the new credit card reform, I'm kind of against the 21 year old rule. Why is it that the government has to put a higher age limit on this? Don't you become an adult at age 18? You should be able to make your own decisions, rather than the government making it for you.

Instead, they should cap the credit limits, and force college kids to take financial courses. I don't think debt is going to go away with students, because how is a 22 year old student any different than a 19 year old?

[Robert]

Education is the answer, like with anything. Unfortunately, education is not mandatory or easily available. Knowing the difference between right and wrong (good vs. bad) is something you either learn from someone else who has experienced it or by experiencing it yourself.

I think a limit on age will somewhat improve the system, but not nearly enough to start a revolution. The idea will only pass the buck down to the parents. I think abuse is the main factor to look at here. How can we stop it or alleviate it? Education!

[monica]

As a 21 years old who has $4,000+ in credit card debt and student loans I can say that increasing the age limit is a great idea. Although legally at the age of 18 you are an adult that does not necessarily mean you can spend rationally like an adult. At the age of 18 you are still very impulsive and dont really think about all the interest that is acrued over time. I think that if I were given my first credit card at this age I would definitely have better credit.You have much more to lose at 21 with credit card debt than at 18 when you don`t need credit for much.

[Chanda]

So now that the law has changed, it will be nearly impossible for a student to start to build credit! I got my first card right after I graduated from high school- 5 years ago, and have opened one every year since to more credit on my file. But anytime I apply for anything larger than a credit card, the response is NO because I lack sufficient credit history. Changing this law is basically shooting students in the foot later on down the road.