Once upon a time, not so long ago, having lots of available credit meant that you were "inevitably" doomed to go on a massive spending spree of epic proportions. Each unused dollar was a ticking debt time bomb, because even responsible users of credit would surely be lured into the vortex of temptation caused by those shiny cards with winking holographs.
But while conventional wisdom held that excessive credit – even unused – was a liability, Fair Isaac says there is no such thing as too much available credit when it comes to how they score credit. In fact, Fair Isaac's Barry Paperno states, "There really is never any good reason to close an account."
Three reasons why NOT to close an account:
1. The FICO score does not penalize you for having too much available credit. (Opening a bunch of new accounts may be a problem, but by itself, available credit is not a factor.)
2. While closing an account does not immediately eliminate all of the history associated for that account, the bureaus will automatically remove a closed account in 10 years (or less, if the credit card issuer decides to remove it). History – or how long you've had credit – accounts for 15% of your score. If you close an account that you've had for a long time, and your only remaining credit history is from credit cards or loans that were opened recently, it will negatively impact your score once that account falls off your report.
3. Closing an open account with a good history may negatively impact your ratio of balances-to-limits. Say, for example, that you have four cards with credit limits of $2,000 each, for a total available credit limit of $8,000. If you owe $1,000 on three cards, and you close the fourth, your debt ratio will increase from $3,000:$8,000 (37.5%) to $3,000:$6,000 (50%). This ratio accounts for 30% of your credit score. The higher the debt ratio, the lower your score.
Showing posts with label credit. Show all posts
Showing posts with label credit. Show all posts
Tuesday, April 1, 2008
Tuesday, March 25, 2008
What is my REAL credit score?
Dear Credit Mama,
I've been working hard to pay all of my bills on time and have almost paid off my credit cards. I want to see if my efforts have made my credit score go up. I've looked into buying my credit score online, but it's confusing because different companies have different ranges for what your credit score could be – some have scores that go to 850, some go to 990. What's the deal? And which one should I believe?
--Angie, St. Louis, MO
Dear Angie,
Very astute of you to notice this! You are right – not all credit scores are the same.
The "FICO" score was invented by Minneapolis-based Fair Isaac Corp. in 1988 as an attempt to quantify the odds that borrowers will repay loans on time. The company’s name is derived from those of Bill Fair and Earl Isaac, an engineer and a mathematician, who created the credit scoring concept and founded Fair Isaac in the 1950s.
FICO scores range from 300-850. FICO calculates your score using the following factors:
"Vantage" scores, dubbed "FAKO" scores, were developed by the three credit bureaus and introduced in 2006 to compete with FICO scores. Because they do not have the actual FICO formula (a secret as closely guarded as Coca Cola's recipe), they are only approximations of the FICO score.
Vantage credit scores range from 501-990. Each 100-point interval corresponds to a letter grade, in ascending order. A score of 501 to 600, for example, would translate into a grade of "F", while someone with a score greater than 900 would receive an "A." Vantage calculates your score using the following factors:
FICO Vs. FAKO
Consumers usually buy their credit scores from the credit bureaus – the VantageScore. However, Fair Isaac states that most lenders (90% of the 100 largest banks) use the FICO score. (To complicate matters, some lenders create their own variation on a FICO score, adding in their own criteria.) Your "FAKO" scores can differ from your FICO scores by as much as 50 points.
More than two-thirds of all consumers qualify for a grade of "C" or higher. FICO scores, by contrast, range from 300 to 850, with 85 percent of Americans coming in at higher than 600. If you found a score of higher than 850 then you are "buying" one of the other scores - not the FICO score that lenders use.
Fair Isaac has filed a federal antitrust lawsuit against the nation's three credit bureaus, alleging they are "misleading and confusing consumers" when selling their own version of the credit score. They contend that since Equifax, Experian and TransUnion own the consumer data it uses to create the FICO scores, they could "unfairly manipulate the credit score price, sales and distribution process" to promote VantageScore.
The bureaus claim that the new scoring model increases competition, giving more choices to credit grantors and consumers.
Having more scoring options is good for lenders, but not necessarily good for consumers. With multiple scoring models, the odds increase that a lender can find a score to use to declare you a subprime candidate and increase your rates.
If you are trying to qualify for a mortgage or other major loan, you will want to access the real FICO, not the FAKO. Our friends at mycreditroadmap.com can link to you a FICO credit reporting product that will give you reports and scores for each of the three national credit bureaus.
I've been working hard to pay all of my bills on time and have almost paid off my credit cards. I want to see if my efforts have made my credit score go up. I've looked into buying my credit score online, but it's confusing because different companies have different ranges for what your credit score could be – some have scores that go to 850, some go to 990. What's the deal? And which one should I believe?
--Angie, St. Louis, MO
Dear Angie,
Very astute of you to notice this! You are right – not all credit scores are the same.
The "FICO" score was invented by Minneapolis-based Fair Isaac Corp. in 1988 as an attempt to quantify the odds that borrowers will repay loans on time. The company’s name is derived from those of Bill Fair and Earl Isaac, an engineer and a mathematician, who created the credit scoring concept and founded Fair Isaac in the 1950s.
FICO scores range from 300-850. FICO calculates your score using the following factors:
- 35% payment history
- 30% amount owed
- 10% tpes of credit in use
- 15% length of credit history
- 10% new credit
"Vantage" scores, dubbed "FAKO" scores, were developed by the three credit bureaus and introduced in 2006 to compete with FICO scores. Because they do not have the actual FICO formula (a secret as closely guarded as Coca Cola's recipe), they are only approximations of the FICO score.
Vantage credit scores range from 501-990. Each 100-point interval corresponds to a letter grade, in ascending order. A score of 501 to 600, for example, would translate into a grade of "F", while someone with a score greater than 900 would receive an "A." Vantage calculates your score using the following factors:
- 32% payment history
- 23% utilization of available credit
- 15% credit balances
- 13% length and depth of credit history
- 10% recently opened credit accounts
- 7% available credit
FICO Vs. FAKO
Consumers usually buy their credit scores from the credit bureaus – the VantageScore. However, Fair Isaac states that most lenders (90% of the 100 largest banks) use the FICO score. (To complicate matters, some lenders create their own variation on a FICO score, adding in their own criteria.) Your "FAKO" scores can differ from your FICO scores by as much as 50 points.
More than two-thirds of all consumers qualify for a grade of "C" or higher. FICO scores, by contrast, range from 300 to 850, with 85 percent of Americans coming in at higher than 600. If you found a score of higher than 850 then you are "buying" one of the other scores - not the FICO score that lenders use.
Fair Isaac has filed a federal antitrust lawsuit against the nation's three credit bureaus, alleging they are "misleading and confusing consumers" when selling their own version of the credit score. They contend that since Equifax, Experian and TransUnion own the consumer data it uses to create the FICO scores, they could "unfairly manipulate the credit score price, sales and distribution process" to promote VantageScore.
The bureaus claim that the new scoring model increases competition, giving more choices to credit grantors and consumers.
Having more scoring options is good for lenders, but not necessarily good for consumers. With multiple scoring models, the odds increase that a lender can find a score to use to declare you a subprime candidate and increase your rates.
If you are trying to qualify for a mortgage or other major loan, you will want to access the real FICO, not the FAKO. Our friends at mycreditroadmap.com can link to you a FICO credit reporting product that will give you reports and scores for each of the three national credit bureaus.
Thursday, February 28, 2008
AmEx Artificially Deflates Credit Scores
As you may recall from previous posts, 30% of your credit score is based on your debt ratio. The Big Three credit reporting agencies – that's Experian, TransUnion, and Equifax - use special software to calculate this ratio.
We've already discussed the Sneaky Credit Industry Trick where some credit card companies do not report the actual credit limit, which causes the software to use the highest reported balance as the "credit limit," biasing debt utilization calculations against the consumer. This was one way to artificially deflate their customers' credit scores, making them unattractive to their competitors.
According to SmartMoney, American Express is among a number of credit card companies that are now employing another Sneaky Credit Industry Trick: chasing balances. Consumers are reporting that as they pay down their credit card balances, the credit card company is penalizing them by lowering their available credit limit.
They tell the story of Trent Charlton, who paid off more than $8,000 in credit card debt in the last six months, with the goal of paying off an additional $10,000 in the coming weeks.
Looking at the subprime crisis and weakening economy, this would be a logical rationale - except they are not targeting just high-risk customers. Lenders now are including customers that - not that long ago - would have been considered good customers, even considering factors such as where the customer lives (ie: in an area of high foreclosures) or where he or she works (mortgage companies, construction-related businesses and home builders).
Trent's credit score SHOULD have increased significantly based on his repayments. His original credit limit was $20,000. After paying the balance down to $10,000, he should have a 50% debt utilization ratio. Instead, by dropping his credit limit to $10,300, the scoring algorithm calculates his debt utilization ratio to nearly 100% - making him a "bad" candidate for credit.
The same goes for the GE Money credit line. With a credit limit of $15,000, his debt ratio SHOULD be just under 47% after paying down his balance to $7,000. Instead, by dropping his limit to $7,500, his debt ratio is over 93%.
According to Craig Watts of Fair Isaac (the company that created the FICO score), if your credit utilization is 50% or more of your credit limit, "you are doing some real damage to your credit score." And when the new FICO scoring model is released in May, "if you have a utilization of over 50%, you'll be penalized even more heavily."
Clearly, the system is flawed as it is not accurately representing the borrower's willingness or ability to pay. And with such high debt ratio calculations, other lenders will probably think twice before issuing Trent more credit - keeping him locked in with American Express and GE Money Bank until his debt is completely paid off.
We've already discussed the Sneaky Credit Industry Trick where some credit card companies do not report the actual credit limit, which causes the software to use the highest reported balance as the "credit limit," biasing debt utilization calculations against the consumer. This was one way to artificially deflate their customers' credit scores, making them unattractive to their competitors.
According to SmartMoney, American Express is among a number of credit card companies that are now employing another Sneaky Credit Industry Trick: chasing balances. Consumers are reporting that as they pay down their credit card balances, the credit card company is penalizing them by lowering their available credit limit.
They tell the story of Trent Charlton, who paid off more than $8,000 in credit card debt in the last six months, with the goal of paying off an additional $10,000 in the coming weeks.
Six months ago, Charlton paid his American Express credit-card balance down to $14,000, AmEx decreased his limit from $20,000 to $14,300. Another payment several weeks ago brought his balance down to $10,000 — AmEx then cut his limit to $10,300. AmEx has also slashed the $2,000 limit on a card he rarely uses down to $500, barely above his $300 balance. And the limit on his GE Money Card (issued by General Electric Money Bank) where he owes $7,000, was recently cut from $15,000 to $7,500.With an increasing number of delinquencies, credit card companies are doing everything they can to tighten lending standards and reduce the risk of default. CNN's latest statistics show the percentage of people who are late on their credit card payments is the highest it's been in three years.
Looking at the subprime crisis and weakening economy, this would be a logical rationale - except they are not targeting just high-risk customers. Lenders now are including customers that - not that long ago - would have been considered good customers, even considering factors such as where the customer lives (ie: in an area of high foreclosures) or where he or she works (mortgage companies, construction-related businesses and home builders).
Trent's credit score SHOULD have increased significantly based on his repayments. His original credit limit was $20,000. After paying the balance down to $10,000, he should have a 50% debt utilization ratio. Instead, by dropping his credit limit to $10,300, the scoring algorithm calculates his debt utilization ratio to nearly 100% - making him a "bad" candidate for credit.
The same goes for the GE Money credit line. With a credit limit of $15,000, his debt ratio SHOULD be just under 47% after paying down his balance to $7,000. Instead, by dropping his limit to $7,500, his debt ratio is over 93%.
According to Craig Watts of Fair Isaac (the company that created the FICO score), if your credit utilization is 50% or more of your credit limit, "you are doing some real damage to your credit score." And when the new FICO scoring model is released in May, "if you have a utilization of over 50%, you'll be penalized even more heavily."
Clearly, the system is flawed as it is not accurately representing the borrower's willingness or ability to pay. And with such high debt ratio calculations, other lenders will probably think twice before issuing Trent more credit - keeping him locked in with American Express and GE Money Bank until his debt is completely paid off.
Wednesday, February 27, 2008
A Credit Check for the Lunch Lady
Current and prospective school employees in Bentonville, Arkansas, may soon find their credit histories under the spotlight if a proposed policy requiring every district employee or applicant who handles money or uses a credit card to consent to a personal credit check is passed.
That includes everyone from top executives managing the district's budget to the cafeteria manager to "department heads who reserve conference and hotel rooms with district credit cards, bookkeepers, all employees who process paychecks and perhaps even district employees who volunteer in their off-hours to work at school concession stands."
It's becoming more common for employers to run credit checks on prospective employees. There is the belief that a person's credit history can indicate how he or she handles money, which translates into how he or she would handle the company's money. In this situation, the policy would also apply to existing employees.
But credit scores can be negatively impacted in a number of ways that may not necessarily show willingness or ability to pay, or indicate that the person would misuse their position to steal or embezzle funds. If they recently applied for credit, if they have fully paid off an old collection account, if they are young and haven't established a lengthy credit history, or if they use a credit card from a company that doesn't report their actual credit limit, their score will be lower. Identity theft victims may not even be aware that their credit file has been hijacked until an employer runs a check.
According to The Morning News, committee members questioned whether someone with an unfavorable credit score still could be hired or allowed to continue working for the district. Steve Potts, the executive director of Human Resources, confirmed that credit scores would be part of the hiring process and would also be considered when allowing an employee to continue in a job.
Superintendent Gary Compton stated he believed that by conducting credit checks, administrators might more easily spot mishandling of taxpayer money, or those prone to do so.
But your Credit Mama believes that credit scores are an increasingly unreliable predictor of future performance - that is clearly apparent with the current subprime meltdown. Eight out of 10 credit reports contain errors. Imagine if your work product was only correct 20% of the time! Yet our society is using this seriously flawed data to make major decisions that impact our lives.
The Bentonville School Board Policy Committee is due to review this measure at next month's meeting.
That includes everyone from top executives managing the district's budget to the cafeteria manager to "department heads who reserve conference and hotel rooms with district credit cards, bookkeepers, all employees who process paychecks and perhaps even district employees who volunteer in their off-hours to work at school concession stands."
It's becoming more common for employers to run credit checks on prospective employees. There is the belief that a person's credit history can indicate how he or she handles money, which translates into how he or she would handle the company's money. In this situation, the policy would also apply to existing employees.
But credit scores can be negatively impacted in a number of ways that may not necessarily show willingness or ability to pay, or indicate that the person would misuse their position to steal or embezzle funds. If they recently applied for credit, if they have fully paid off an old collection account, if they are young and haven't established a lengthy credit history, or if they use a credit card from a company that doesn't report their actual credit limit, their score will be lower. Identity theft victims may not even be aware that their credit file has been hijacked until an employer runs a check.
According to The Morning News, committee members questioned whether someone with an unfavorable credit score still could be hired or allowed to continue working for the district. Steve Potts, the executive director of Human Resources, confirmed that credit scores would be part of the hiring process and would also be considered when allowing an employee to continue in a job.
Superintendent Gary Compton stated he believed that by conducting credit checks, administrators might more easily spot mishandling of taxpayer money, or those prone to do so.
But your Credit Mama believes that credit scores are an increasingly unreliable predictor of future performance - that is clearly apparent with the current subprime meltdown. Eight out of 10 credit reports contain errors. Imagine if your work product was only correct 20% of the time! Yet our society is using this seriously flawed data to make major decisions that impact our lives.
The Bentonville School Board Policy Committee is due to review this measure at next month's meeting.
Friday, February 1, 2008
Credit & Predatory Lending: Hillary's Plan
Did you know:
- Americans have a record $940 billion in revolving debt, and the average person carries up to nine different credit cards. (Federal Reserve, 2007)
- The average family carries thousands in credit card debt; over 10% of credit card users carry a balance of $10,000 or more. (Fair Isaac, 2007)
- Low-income credit card holders pay (on average) the highest starting interest rates - and are more than twice as likely to pay penalty interest rates than those with the highest incomes. (Demos, 2007)
With the current economic pressures causing rising foreclosure rates due to resetting mortgages and increasing costs for essentials - food, health care, education and energy- credit health is becoming a hot election issue.
On the heels of Barack Obama's Five Star Plan, Hillary Clinton unveiled a Fair Credit for Families Agenda, which seeks to address predatory lending and expand access to fair credit. The plan includes measures to:
- Impose a 30% cap on annual interest rates for credit cards and work toward a lower cap. (A GAO survey found that up to 25% of credit cards issued by banks charged penalty rates over 30%.)
- Prevent credit card companies from unfairly increasing interest rates or charging interest in unfair or unreasonable ways, such as universal default clauses, applying new interest rates to old transactions, and collecting interest on late penalties. Credit card companies would have to apply payments to the portion of the outstanding balance with the highest interest rate, and only be allowed to collect interest on the unpaid portion of the previous month's bill (for example, if you pay off a $500 balance, you should not have to pay interest on that $500 balance the following month).
- Require that credit card companies provide clear, easy-to-understand information about credit card terms and fees. In 2006, the credit card industry collected $97 billion in interest charges and $18 billion in penalty fees. (CardTrak, 2008)
- Create a new Financial Product Safety Commission to police credit products in the wake of declining regulation for credit card companies and banks.
- Crack down on abusive payday lenders and refund anticipation loan providers, many of whom charge excessive fees.
Friday, January 18, 2008
650,000 Affected in Latest Credit Data Breach
In yet another case of sensitive data becoming MIA (missing in action), the personal information of 650,000 people, including names, addresses, account numbers, Social Security numbers, and other information, was comprised when GE Money Americas and its backup storage vendor, Iron Mountain, lost an unencryted backup tape.
The backup tape contained data on customers for JC Penney and up to 100 other retail store customers.
GE Money alerted the New Hampshire Attorney General's office of this security breach on Dec. 28, 2007. According to their notice, the tape was checked into Iron Mountain's secure facility and never checked out, but a search of Iron Mountain's premises and theirs has been unable to locate it.
It is hard to assess if the information on the missing tape is being used inappropriately or whether it will be misused in the future. GE Money is offering 12 months of credit monitoring for those persons that had Social Security numbers on the lost tape.
As anyone familiar with the TJ Maxx data breach knows, 12 months is a short blip in the lifespan of sensitive personal data like Social Security numbers. It becomes the consumer's burden to regularly and consistently check his or her credit report for possible identity theft issues. If you fear that your personal identifiable information has been compromised, you can elect to implement a "freeze" on your credit.
To contact GE Money, call toll-free Monday through Friday, 9:00 am to 7:00 pm EST, at 1-866-913-6690.
The backup tape contained data on customers for JC Penney and up to 100 other retail store customers.
GE Money alerted the New Hampshire Attorney General's office of this security breach on Dec. 28, 2007. According to their notice, the tape was checked into Iron Mountain's secure facility and never checked out, but a search of Iron Mountain's premises and theirs has been unable to locate it.
It is hard to assess if the information on the missing tape is being used inappropriately or whether it will be misused in the future. GE Money is offering 12 months of credit monitoring for those persons that had Social Security numbers on the lost tape.
As anyone familiar with the TJ Maxx data breach knows, 12 months is a short blip in the lifespan of sensitive personal data like Social Security numbers. It becomes the consumer's burden to regularly and consistently check his or her credit report for possible identity theft issues. If you fear that your personal identifiable information has been compromised, you can elect to implement a "freeze" on your credit.
To contact GE Money, call toll-free Monday through Friday, 9:00 am to 7:00 pm EST, at 1-866-913-6690.
Tuesday, December 4, 2007
When Good Payers Get Screwed
You are one of the "responsible" ones.
You have a few credit cards with decent rates. And you've always paid those bills on time.
So you don't think twice about that holiday discount offer - you know, the one where you can save an additional 10-15% on your purchase if you open up a department store credit card. Your credit is good - you are approved!
The next month, you get your credit card statements and fall out of your chair. Your credit card issuers have just raised your interest rates!
How could this happen when you've always paid your bills on time?
In yet another example of abusive credit card industry practices, big financial companies have adopted policies where they can bump up a consumer's interest rate for their credit card when their FICO score declines - even if they have never paid late on that card. Mind you, your FICO can decline when you do something as simple as open a department store credit card.
Members of Congress are currently investigating this and other abusive practices. The subcommittee found that in many cases, consumers have little notice of the increased rate, which are automatically triggered by declines in FICO scores "for reasons left unexplained."
Five big financial companies issue around 80% of credit cards in the U.S. -- Bank of America Corp., Capital One Financial Corp., Citigroup Inc., Discover Financial Services LLC, and JPMorgan Chase & Co.
One week prior to the Congressional subcommittee's hearing on the issue earlier this year, Citigroup suddenly announced that it would no longer make "any-time-for-any-reason" increases to interest rates and fees charged to customers, at least until a credit card expires and a new one is issued (usually in two years). JPMorgan Chase followed suit, saying they also will discontinue the practice.
But legislation may still be needed to get other companies to do the same - and at least mandate that credit card issuers give customers adequate notice (at least 45 days) of terms and rate increases in language that can be understood by a fifth-grader.
You have a few credit cards with decent rates. And you've always paid those bills on time.
So you don't think twice about that holiday discount offer - you know, the one where you can save an additional 10-15% on your purchase if you open up a department store credit card. Your credit is good - you are approved!
The next month, you get your credit card statements and fall out of your chair. Your credit card issuers have just raised your interest rates!
How could this happen when you've always paid your bills on time?
In yet another example of abusive credit card industry practices, big financial companies have adopted policies where they can bump up a consumer's interest rate for their credit card when their FICO score declines - even if they have never paid late on that card. Mind you, your FICO can decline when you do something as simple as open a department store credit card.
Members of Congress are currently investigating this and other abusive practices. The subcommittee found that in many cases, consumers have little notice of the increased rate, which are automatically triggered by declines in FICO scores "for reasons left unexplained."
Five big financial companies issue around 80% of credit cards in the U.S. -- Bank of America Corp., Capital One Financial Corp., Citigroup Inc., Discover Financial Services LLC, and JPMorgan Chase & Co.
One week prior to the Congressional subcommittee's hearing on the issue earlier this year, Citigroup suddenly announced that it would no longer make "any-time-for-any-reason" increases to interest rates and fees charged to customers, at least until a credit card expires and a new one is issued (usually in two years). JPMorgan Chase followed suit, saying they also will discontinue the practice.
But legislation may still be needed to get other companies to do the same - and at least mandate that credit card issuers give customers adequate notice (at least 45 days) of terms and rate increases in language that can be understood by a fifth-grader.
Monday, November 5, 2007
$3,000 Credit Limit and No Job
When I went to college, I was armed with a word processor (because I couldn't afford one of the newfangled computers), flannel jeans (I was a Florida girl who couldn't wait to experience her first Boston winter) and a toaster oven (for making toast and baking cookies). What I didn't bring, though, was any lick of common sense about credit or credit cards or interest rates. (Not entirely my fault - growing up, my parents were very hush-hush about finances. Talking about finances was like talking about that crazy mouthy aunt with chin hairs - you just didn't do it, but if you had to, it was always in a low voice and the topic was always dropped after a minute or two.)
So naturally, being a broke college student, I signed up for several credit cards. The credit card companies were everywhere on campus. What a deal! Not only did I get credit cards, I got some cool T-shirts and water bottles too.
I was thrilled when the credit cards came in the mail. I felt so "grown up." And the amount of money I could charge - one card had a $3,000 limit! - boggled my mind. Free money! I got my hair cut at a tony place on Newbury Street. I developed an obsession with expensive perfume. I treated my other broke college friends to dinner. I charged right up to my $3,000 limit.
When the bill came, it was all I could do to make the minimum payments. I had a job, but the majority of that had to go toward my work-study commitment. Long story short - I DID pay off the credit card - but it took YEARS to do so.
When I read "The dirty secret of campus credit cards" in BusinessWeek, it brought back a lot of memories and questions. Why in the world would a credit card company give a $3,000 limit to a college student who stated on her credit application that she had no job? But marketing to college students - easy targets because of their limited financial resources and naivete - has been part of campus culture for decades.
Why? Colleges and universities benefit from "sweetheart deal" kickbacks. We're not just talking free dinners. We're talking about secretive deals worth $20 million dollars per university. Schools earn "a set fee for each student, alumnus, or professor who signs up for a credit card, as well as a percentage of overall charges made on the cards." In exchange, the school gives credit card companies access to student lists and exclusive marketing privileges at school events.
Can you blame the schools? State schools are having an especially hard time as they deal with budget cuts. But in an era when more than 85 million people have joined the national Do Not Call list (and that figure is from 2005!), why are secret deals being made to release student information to the types of companies that many of us have chosen to avoid?
Well, that may stop. State legislatures in New York, Texas and Oklahoma voted earlier this year to clamp down on marketing credit cards to college students. And I understand that this is an issue that Congress will be examining in greater depth.
Don't get me wrong. I am not against issuing credit to college students or stifling capitalism. I do think, though, that college students - and many adults too - don't understand the increasingly complicated terms and conditions of credit cards, or even the basics of how they impact their credit and financial health. All I'm saying is - let's do this responsibly, and include in their education not just English, calculus and biology, but the ability to understand and manage credit cards wisely.
So naturally, being a broke college student, I signed up for several credit cards. The credit card companies were everywhere on campus. What a deal! Not only did I get credit cards, I got some cool T-shirts and water bottles too.
I was thrilled when the credit cards came in the mail. I felt so "grown up." And the amount of money I could charge - one card had a $3,000 limit! - boggled my mind. Free money! I got my hair cut at a tony place on Newbury Street. I developed an obsession with expensive perfume. I treated my other broke college friends to dinner. I charged right up to my $3,000 limit.
When the bill came, it was all I could do to make the minimum payments. I had a job, but the majority of that had to go toward my work-study commitment. Long story short - I DID pay off the credit card - but it took YEARS to do so.
When I read "The dirty secret of campus credit cards" in BusinessWeek, it brought back a lot of memories and questions. Why in the world would a credit card company give a $3,000 limit to a college student who stated on her credit application that she had no job? But marketing to college students - easy targets because of their limited financial resources and naivete - has been part of campus culture for decades.
Why? Colleges and universities benefit from "sweetheart deal" kickbacks. We're not just talking free dinners. We're talking about secretive deals worth $20 million dollars per university. Schools earn "a set fee for each student, alumnus, or professor who signs up for a credit card, as well as a percentage of overall charges made on the cards." In exchange, the school gives credit card companies access to student lists and exclusive marketing privileges at school events.
Can you blame the schools? State schools are having an especially hard time as they deal with budget cuts. But in an era when more than 85 million people have joined the national Do Not Call list (and that figure is from 2005!), why are secret deals being made to release student information to the types of companies that many of us have chosen to avoid?
Well, that may stop. State legislatures in New York, Texas and Oklahoma voted earlier this year to clamp down on marketing credit cards to college students. And I understand that this is an issue that Congress will be examining in greater depth.
Don't get me wrong. I am not against issuing credit to college students or stifling capitalism. I do think, though, that college students - and many adults too - don't understand the increasingly complicated terms and conditions of credit cards, or even the basics of how they impact their credit and financial health. All I'm saying is - let's do this responsibly, and include in their education not just English, calculus and biology, but the ability to understand and manage credit cards wisely.
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