Ripon College Days

Media Credit: Photo courtesy of www.fewings.ca [Click to enlarge]

"Keep your money in a box underneath the mattress." That's the advice of Ripon College senior Jessica Forman, who says she's plagued with credit card debt.

"I live on my credit card," says sophomore Axel Owen.

Indeed, more undergraduate students are carrying more credit cards with larger balances than ever before. Midwesterners in particular carry the highest credit card balances.

Credit cards are actually short-term, high interest, unsecured loans. There are no federal usury laws to protect consumers, and banks based in Delaware and South Dakota, where there are no state limits on interest rates can export their high rates across the country, even here to Wisconsin. Of the major credit card issuers, nearly all are located in states where there are no caps on interest rates.

But, even "fixed" rates can fluctuate. A fixed rate is not what it seems to be. Rather than being fixed at a specific rate, it is fixed to the market and changes from quarter to quarter.

Beware of low introductory rate cards that advertise low or no interest. Charges usually automatically rise within the first six months to a year, sooner for those who struggle with late payments.

Credit card companies can change your rate at will anyway, as long as they give you fifteen days notice. They often raise it automatically if you are late on any payment, not just on their credit card.

The way one uses their credit card can also affect the gas bill. One's credit score, calculated partly by using data about their credit card usage, can be used to adjust utility rates. In 2004, Texas natural gas provider TXU Energy raised their rates higher for customers with lower credit scores.

Over the last 25 years, credit cards have become immensely profitable for a number of reasons. Andrew S. Kahr, a prodigy who earned his MIT Ph.D. in mathematics before he was 20, changed the face of credit card banking with a number of revolutionary ideas, such as the credit score. The credit score allows a bank to consider how risky a customer may be. "If someone is riskier, he should be paying a higher rate," Kahr says.

The three major credit card bureaus use a number of factors to determine credit scores, a number between 300 and 850 that banks use to determine one's trustworthiness. It is calculated with information collected from the banks one does business with as well as from in the public record (including bankruptcies, outstanding child support and court judgments.)

The three major credit bureaus (Equifax, Trans Union and Experian) collect nearly 540 billion pieces of information a year and produce 12 billion reports every year. Until last year, credit reports cost consumers money. Now, you can request a free copy of your credit report online, at www.annualcreditreport.com.

It is important for one to request and proof their credit report, as banks tend to be unreliable when reporting information about their customers. It is not in their best interest for you to have a high credit score and pay your bill on time. In fact, in the industry, people who pay their bills on time are referred to as "deadbeats."

The customers that the credit card companies make the most money on, those who pay their bills late, pay only the minimum, exceed their credit limit, and accrue the large balances that turn over month to month are known as "revolvers."

"It didn't require a lot of investigation to see that the people who paid in full every month were not profitable," says Kahr.

"Revolvers" are often college students, with lots of student loans and other expenses that stretch their budgets. "Being a college student, I pay just above the minimum required," says Forman.

"I've only been late once though," says Forman, "but I found that the payments I've been making have only been covering the finance charges for the last six months."

Late charges are another significant source of revenue for the credit card companies. Over the last decade, many companies have eliminated grace periods and shortened the time between when you receive the statement, and when the payment is due.

"I don't get my statements on time," says sophomore Jewel Mucklin.

Credit companies, following Kahr's lead, have also changed other parts of the standard credit card contract to inflate profits. For instance, credit card companies have lowered the minimum payment from the once-standard 5% to 2%, allowing for larger credit lines and more opportunity for greater debt, with the same minimum payment.

Approximately 35 million Americans make only the minimum payment on their credit cards, many of whom can afford to pay more. Some of those could even pay off the entire balance in one or two installments- but prefer to let their money remain in low-yielding savings accounts.

Information for this article courtesy: The Secret History of the Credit Card: PBS Frontlines; Undergraduate Students and Credit Cards: An Analysis of Usage Rates and Trends, by the Nellie Mae Foundation; www.wikipedia.org.

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