Students stocking up for fall semester needs after a tight summer job market became more vulnerable than ever to plastic predators. Consumer fury over the marketing practices of credit card companies forced politicians to take action last spring, but students won’t see any relief this academic year. Many reforms don’t take affect until July, 2010.

President Barack Obama met in April with executives of 14 credit card companies, including Bank of America, MasterCard, Visa, Capital One, Citigroup and American Express. He sought to spur reform in an industry that has long imposed brutal penalties on consumers and successfully fought attempts to legislate regulation of industry practices. And, on May 22, he signed into law the Credit Cardholders’ Bill of Rights, a measure enacted by the U.S. House of Representatives in response to constituent outrage to eliminate consumer abuse.

Photo by Shelley Neuman

Blakesley King swipes a credit card at Big Top Candy Shop.  College students are among those most vulnerable to accruing excessive credit card debt.

Among the most vulnerable to credit abuse are college students. Already faced with higher costs and tuition increases, they graduate saddled with student loan payments, but fewer employment opportunities. To compensate, they overcharge their credit cards.

Targeted by card companies and some alumni organizations who profit from recruitment and card use, students are often victimized by the fine print.

The average undergraduate, in 2008, carried $3,173 in debt on plastic—up from $2,169 in 2004 and the highest amount since Sallie Mae, a leading college loan financing company, began collecting data in 1998. Students who used credit cards to pay for direct education expenses, such as textbooks, school supplies, tuition and fees, estimated charging for $2,200—more than double 2004’s average of $942. That included 92% of undergraduate credit cardholders, an increase from 85% in the previous study.

Amid the nation’s subprime mortgage meltdown, job losses, foreclosures and the general downsizing that followed, many consumers turned to credit cards to make ends meet. They now find it difficult to make payments on card balances that quickly become inflated and distorted by unexpected retroactive interest rate increases, shorter payment due dates and lower credit limits.

Limits and rates

According to Christine Lindstrom, education coordinator for U.S. Public Interest Research Group Lower, lower credit limits can adversely effect a consumer’s credit report. If a student, for example, carries a balance of $500 on a card with a limit of $1,000, but the company suddenly cuts the limit in half, it would appear the student has maxed out the card.

Carrying credit cards at their maximum balance affects how credit is scored and drops the perceived reliability ranking of consumers who have reached their credit limit. The percpetion that a consumer has become an increased risk automaticlly triggers higher interest rates on balances and the imposition of additional fees that further complicate the ability to pay off balances--which then affects future borrowing opportunities, Lindstrom said.

Sudden high-interest rates can particularly affect students. Many fail to understand how the new rates become part of their debt, said Frank Nese, managing director for the law offices of Jordan McKenna, which offers help for debt consolidation. If students only make minimum payments on their balances, in some cases it can take up to 20 years to pay their balances, a struggle made longer by the changed interest rates, Nese said.

Banks also penalize for late payments with both fees and enormous interest rate hikes, thus further imprisoning already-strapped consumers.

“We’ve seen situations where clients’ interest rates will increase tremendously after they are only one day late on their payment,” Nese said. “ In one case, a client’s interest rate went from 9.9% to 29%—for being one day late.”

Students should also be aware of universal-default practices utilized by most card companies. Late payment on a credit card or even a utility bill are reported universally through databases and that can result in increased interest rates from other creditors as well.

Such practices can push consumers over the edge, and yet, Nese said, credit card companies are unlikely to work with people on repayment plans. The McKenna firm advertises heavily on Austin radio stations and Nese said they’ve been getting a lot more calls from students.

“Only keep one credit card for emergencies,” Nese advises. “We don’t want you as a client.”

Junior Aryn Brown said she received calls from card company representatives from early morning to late night once she fell behind on payments. She was approximately $2,000 in total debt between four credit cards and signed up for debt consolidation. An agency took over her account, stopped interest rate escalation and, in return for service fees, will make her payments. The hassling calls have stopped, she said. But improving her credit score and clearing the consolidation from her credit rating will take at least seven years.

“Once you have one credit card it’s easier to get another one,” said Brown, 21, a human development and family sciences major at UT Austin. “(I thought), I can run up all this debt and then once I have the money, a real job with a salary, it will be really easy to just close them out.”

Instead, Brown fell into a predictable cycle. Her credit card limits would automatically increase after a few months, tempting her to spend more. She just wanted out, she said.

Free t-shirts and pizza, just sign here

Credit card companies offer students credit cards so that they can begin building their credit scores early, said a Bank of America representative who declined to be named.

“We are not setting them up to fail, we are helping them build credit,” he said.

But students make up a vulnerable market that should not be so excessively targeted, said Linda Payne, branch manager for the University Federal Credit Union. Students represent the highest risk-type borrower because they are just learning how to be responsible financially and will make mistakes, she said.

The credit union, where many students and faculty do business, focuses on making sure students receive a financial education along with the credit cards they apply for, Payne said.

Credit card companies have faced criticism for aggressive marketing on college campuses. Across UT Austin’s sprawling 40 acres, banks usually allowed credit card marketers to assemble sidewalk promotion tables to pitch credit cards to students, enticing them to listen by offering free school supplies, food and games.

This year, credit card marketing seemed quieter, some UT Austin students said.

That’s because credit card companies are learning to adapt during these chaotic economic times, Lindstrom said. Credit card revenue makes up a highly profitable portion of a bank’s budget and every year, there is a fresh new crop of freshmen to go after, she said.

Credit card companies “are retrenching, regrouping, trying to find fresh new ways to get themselves into student pockets,” Lindstrom said.

Burnt Orange credit

Alumni associations also face some heat for recruiting students and alumni to sign up for credit cards embellished with their university’s logo. These organizations receive money from card companies for bringing in consumers.

Texas Exes, UT Austin’s alumni association, holds such a contract with Bank of America, which last year had more than 700 affinity deals with universities to produce credit cards stamped with their respective emblems and logos according to Business Week magazine. The cards designed for UT’s association feature the burnt orange Longhorn logo.

Fewer than 500 students and approximately 80,000 alumni own the UT cards, which aggregates to $1 million in revenue to the association, or about 15% of its total budget, said Jim Boon, executive director and chief executive officer, and committee liaison for Texas Exes. Boon said that money goes to support their $2 million scholarship program for 700 students.

“Newspapers and magazines like to portray us (alumni associations) as the bad guy, or as if we are preying on students,” he said. “But that’s simply not the case. If they didn’t have a Longhorn card, they’d have another kind of card.”

Shopping for debt

Three of Brown’s credit cards came from retail stores, two from where she worked, she said. Retail charge cards tend to have higher interest rates—usually 20% or more.

“They give you points as an employee—rewards and stuff—if you sign people up for credit cards,” she said. “So, I signed myself up.”

Almost every retail store puts pressure on their employees to sign up themselves and others, said Brown, who has worked at Banana Republic and Express. The day she turned 18, her manager at Banana persuaded her to apply for the store’s card.

“My least favorite part about working retail was the credit card stuff,” Brown said. “People don’t need more debt, and you’re sitting there like, ‘Oh well you get 10 percent off, you get rewards and you get gift cards!’ And a lot of people do sign up on impulse just to get the discount not realizing what they are getting involved in.”

Credit plays a role in many aspects of our lives, from where we live to whether we get a job or qualify for a car loan or mortgage. “It’s an institutional power structure, and many students don’t receive the tools to understand it," said UT graduate student Erica Hill. "Schools don’t offer courses on financial literacy, she said

Without medical insurance as an undergraduate, Hill needed emergency hospital care and soon found herself mired in debt. Before she realized it, “you’ve mortgaged your life,” she said. “You’ve fallen into this indentured servitude (to a credit card).”