How to Avoid Credit Card Traps

By Oksana Poltavets, Plattsburgh State University

You must have heard this a million times: "Get yourself a credit card while you're in college and build yourself a solid credit history for a good future." Sounds like a foolproof plan, doesn't it? However, with the recent hike in penalty rates and the increase of monthly minimum payments by certain creditors, having a credit card could do you more harm than good.

"Credit cards can be perfectly useful if you use them responsibly," believes David Rosenfeld, program director for the student-directed Public Interest Research Group, a consumer-advocacy organization. "But they can be a disaster if they're not."

Credit Card Interest Rates Climbing Fast

What started in April as an increase in penalties for late payments escalated into a barrage of higher interest rates and fees for everything from over-limit spending to minimum payments, according to Cardweb.com, a financial news website.

College students are definitely the audience targeted by the recent hikes, believes Rosenfeld. "They are a high-yield market for credit card companies and, because they haven't developed all of their financial habits yet, are more susceptible to marketing pitches."

If you own a Discover card and miss a monthly payment, you will lose the initial low annual percentage rate (APR) advertised in their promotions and instead be forced to pay the standard rate of 16.49 percent. However, the APR will rise even higher if you make late payments or go over your spending limit two or more times within a 12-month period.

Other creditors, such as Citibank, Chase and Bank of America are also increasing their late-payment fees and over-limit spending penalties. The new penalty fee will depend on the amount you owe on your card. Citibank's new late fee for balances of less than $100 is $15, for balances between $100 and $1,000 the late fee increases to $29 and for balances of more than $1,000 the late fee is now $39.

Chase has a similar system for determining the late payment. For example, if your balance is less than $250, your late fee will be $15. However, if your balance is more than that sum, you will pay $39 in late fees. This can add up, especially when undergraduates have an average balance of $2,169, according to a 2004 Nellie Mae study.

If Bank of America is your creditor of choice, you can expect to be charged an interest rate of 29.49 percent for making two late payments or spending over your limit within a 12-month period.

Alongside penalty fee increases, MBNA, Citibank and Bank of America have all doubled their monthly minimum payments since June. This means that instead of paying an average of 2 percent of your balance per month, now you will have to pay at least 4 percent.

Coping with Interest Rate Hikes

So are all these new fees a definite deterrent from getting credit cards or are they simply a new "Buyer Beware" label meant to keep the credit users on their toes?

"If college students are not careful, they could wind up going into debt and, of course, paying far more in interest than they would have paid otherwise," says Rosenfeld of those who may not be able to make payments on time.

To avoid potential debt, he advises college students to shop around before applying for a credit card.

1) Compare rates and fees. It's important to compare costs such as APRs, which can range from 7.99 percent to 30.25 percent, penalty fees, which should not be more than $20 per violation, possible annual fee and penalty APRs, which should not exceed 20 percent and be in place only for a limited time.

2) Limit usage. Carry only one or two major credit cards with you and avoiding using the full available credit line. "Remember that credit card purchases are more expensive than cash or check purchases once interest and other fees are included, so use credit cards sparingly and wisely," he says.

3) Pay in full. Paying off your balance in full is the best way to go, according to Rosenfeld. If you can't swing the sum, then pay as much as you can, but definitely more than the minimum payment.

However, when 76 percent of undergraduates in the United States have at least one credit card, according to the Nellie Mae study, there will be times when spending gets out of control. Cardholders in financial strains should seek credit counseling right away, which is available free or at a low cost, by calling (877) 399-8620 or visiting InCharge Debt Solutions, a nonprofit debt counseling group.

With the new increases in penalty fees and payments, it is important to make wise decisions and take care of your credit before you need to call a counselor. "Know your financial means and limitations, create a budget that takes into account your average credit card payments each month and stick to it," suggests Rosenfeld.