Wednesday, September 19, 2007

Fixing the College Credit-Card Mess, part 4 of 4


But first, an overview of the problem.

House Bill Would Restrict Credit
Congress is voting this year on whether to pass bills that would work to reform an industry that critics argue is in need of supervision. Any federal regulation setting caps on interest rates, late payments, or access to college students would be a good thing, since there is virtually no regulation now.

Congress is hampered by plentiful political contributions from card issuers. The top three campaign contributors from the credit-card industry—Citigroup, JPMorgan Chase, and Bank of America—gave more than $2 million each in the 2006 election cycle.
Legislating the legislative-exempt zone
Credit-card companies have operated since the early 1980s in a legislative-exempt zone created after a series of Supreme Court decisions divested states of their ability to protect consumers by setting caps on interest rates and fees.

Now credit-card companies can export high interest rates from the states where they are located into the states where consumers live, even if those states have restrictions on interest rates or late fees.

That's why if you look on the back of your credit-card statement, you will see that the return address is most likely South Dakota or Delaware—states considered safe harbors for credit-card companies because they have no cap on interest rates or late payments.
Here are five practical steps that curb abuses and help college students and other consumers.

1. Protect students by limiting the amount of credit extended.
No one wants to take credit cards out of the hands of students or to stop credit-card companies from offering students valuable services. Credit in manageable amounts can be a wonderful thing for college students, allowing them to build credit histories and learn to manage money.

Too much credit can be devastating. Credit-card companies need to extend credit in some rational proportion to a student's ability to pay. Ultimately, students need to take responsibility for their own actions, including their credit-card spending.

Extending enormous credit lines to college kids with nominal income can only lead to substantial problems.

Credit limits appropriate to students' means will help them make more responsible decisions, allowing them to learn and make mistakes without devastating consequences.
2. Bring more clarity to credit-card contracts.
Current credit-card contracts hide their many terms and conditions in legalese. Credit-card companies should make key metrics more prominent and visible. Some example metrics are minimum payments, annual percentage rate ("APR," that reveals the true cost of borrowing), and annual fees.

College students often don't realize just how long and how expensive credit-card payments become when only minimum payments are made.

If a student pays only the minimum on a $5,800 balance at 27.99% APR, it will take longer than 27 years to pay it off!
3. Require schools to disclose lucrative contracts.
Universities and colleges nationwide are striking multimillion-dollar affinity contracts with credit-card companies, in which they jointly market cards to students, alumni, and staff.

The deals provide money to the schools in return for handing over marketing privileges, student information for direct mailings, and premier marketing locations at football games and the like to the credit-card companies.

Schools are making millions of dollars through these deals, with some schools earning nearly $20 million dollars.

With so much money at stake, students, alumni, and others should be able to find out the specifics of the contracts—how much money the school makes per year and what the credit-card company gets in return.

Often, schools get a bounty for each student who signs up for a card and they get more money the more the student is charged for interest on debts.
4. Eliminate the most egregious practices.
Credit-card companies zap college students and others with extra charges and fees. Congress and regulators should take aim at the most egregious of these practices.

Start with what's known as "double-cycle" billing. The practice works like this: Imagine a student bought a $1,000 laptop for school in August, and received a credit-card bill on Sept. 1. If the student pays $800 of that debt on time, the student will receive a bill in October that includes interest not only on the outstanding $200 dollars, but also for interest on the entire $1,000 amount. Interest, in the other words, is charged on debt that was already partially paid.

Again, borrow $1,000, pay off $800, and the credit-card company charges you interest on the original $1,000 plus $200, or $1,200! This practice generates interest from debts that were already partially or fully paid!

Another practice is called "universal default." Under universal default, a consumer who has two credit cards and never misses a payment on one card but fails to pay the other card on time can see the interest rates charged on both cards rise.

As of May 2007, a credit-card survey by the advocacy group, Consumer Action, found that 8 in 10 banks still practice universal default, despite public statements to the contrary. They lied, in other words.

There are also fees for what's known as "pay to pay." They charge a so-called convenience fee for transmitting a payment by phone.

Credit-card companies deserve to make a profit. They do, after all, provide valuable services. But card companies make money in numerous ways, from vendors as well as from customers, and credit cards have become the most profitable arm of the banking industry.

One reason for that is their nickel-and-dime practice of charging special fees and charges.

R.K. Hammer, a research and advisory firm, estimates that banks pulled in $17.1 billion from credit-card penalty fees alone in 2006.
5. Keep students informed.
One common clause in credit-card contracts is known as "any time for any reason, including no reason."

If a credit-card company plans to raise the interest rate it should be required to send a letter clearly explaining the change and giving the student the opportunity to pay off the balance. The note should also explain why the interest rate is being raised. Typically now, credit-card companies bury this change in the student's next bill.

Pending legislation, if passed, will help alleviate the student credit-card mess. The onus, however, is on the students. It won't be easy for them. They're bombarded with offers of credit, besieged by marketers on their campuses and at their football games. They're offered free T-shirts, bike rides, coupons, and sometimes iPods.

many students will continue to struggle to get out of, sometimes, large amounts of debt that could potentially harm their chances of getting a good job or an apartment.
There are many potential solutions. Some advocates suggest more financial literacy programs in high school and required personal finance courses in college. That's a very good idea.

Others think universities and colleges should take a more active role in limiting marketing to college kids.

And plenty of activists say it's high time that elected officials and regulators take steps to address the issue of credit cards on campus, especially as the problems of indebted students grow every year.

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