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Plastic PerilMore about the Plastic Prison

My 22-year-old son Jon, a college senior, got 52 credit card offers in the last year. I know this because, like a CIA operative, I intercepted the offers pouring into our mailbox.

He got 19 from Capital One, 13 from Providian, six from Washington Mutual, four from Chase, four from eBay and one each from an assortment of lenders ranging from PayPal to First Premier Bank in Sioux Falls, South Dakota (co-capital with "Small Wonder" Delaware of the credit card kingdom.)

Interestingly, American Express wasn't among Jon's suitors, although he has carried an Amex card (on his father's account) for years, using it occasionally for emergencies and pre-approved expenses.

Most begged Jon to rip open the envelope and wallow in instant gratification. Capital One, the most persistent suitor, shouted:

"Offer Status: Confirmed"
"No Annual Fee!"
"16 Card Designs" (but none that tally the total whenever you use it.)
"You could get a response in as little as 60 SECONDS when you apply online."

Now this kid has never held a job (yet) for more than one summer. He spent one summer working in the FEMA flood insurance call center, which shows how much expertise you need to work there. Although he is familiar with the inner workings of Blockbusters and Starbucks, Jon's not yet a member of any corporate elite, prestigious profession or skilled craftsman's guild. Does this matter?

Not for a second. For credit card companies, getting the hook in early is crucial and college (or high school, in some cases) is definitely that. A 2005 report done by Nellie Mae, the student lender, found that:

• 76% of undergraduates had a credit card;
• Only 21% of college students with credit cards paid them off each month;
• The average balance on student credit cards was $2,169; and
• 25% of students owed $3000 or more.

Starting life after graduation with a few thousand in credit card debt (and possibly many more thousands in student loan debt) affects everything: what kind of job you can afford to take, where you can live, whether you buy a car or take the bus, and even whether you go out for barbeque or brown-bag a peanut butter sandwich next Sunday afternoon.

The evil credit card empire isn't all bad, of course. It lets a young person acquire life's necessities while getting started on a career or pursuing further education. But it takes planning, restraint and the ability to see credit card use as part of your personal financial plan.

Educating the User Before That Balance Grows

The Jump Start Coalition, a nonprofit which tests high school seniors on financial issues every two years, recommends that before getting a credit card, teens should have their own checking account and know how to write checks, keep the register up to date and balance the books each month.

The Coalition also recommends that the teen, rather than his parent, write that check to Visa or MasterCard, to establish the link between credit and cash.

Many programs have sprung up to help students keep themselves in the black. Some are even the brainchildren of students themselves.

Aaron Bach and Matt Davis, seniors at William Jewell College in Kansas, used questionnaire results from the Jump Start survey. They were shocked to find that the average high school student got only 52.4% of the answers right. The two business administration majors put together their own personal finance workshop in response, offering it to local high schools as well as William Jewell College.

In Rhode Island, teacher Ian Lester's "Credit 101," an online tutorial for University of Rhode Island students, was recommended recently by U.S. Treasury Secretary John Snow. "Credit 101" topics include credit card fundamentals, how to set spending priorities and how a bad credit rating can shrink your life choices.

Besides broader-based financial education courses, there are specific tools to help students pick the best credit card for their needs. One of these is www.CreditCardAssist.com, which allows students to compare features of a number of cards.

Several of the site's "picks" include Citibank cards, among them CitiPlatinum Select, Citi MTV U Platinum Select Visa for Students and Citi Driver's Edge Card. All these cards have a current interest rate (as of this writing) of around 17%, with six months of zero interest and no annual fee.

Another resource: www.CreditCards.com, which lets you search categories like "low interest credit cards" or "student credit cards." Then you can compare offers side by side and apply for the card of your choice online.

Avoiding Trouble

No matter which card you choose, it's a good idea to:

• Check the "real" interest rate for purchases, beyond the typically below-market "teaser" or introductory rate. For college cards, the starter rate hovers around 17% but it can quickly rocket up to 29%.

• Find out if there's an annual fee.

• Compare late fees and "over credit limit" fees. The latter can hit you before you know what happened, as early credit limits tend to be low. Often, late fees increase as the balance due goes up.

• Read details of the "default rate," the rate charged if you miss a payment. There can be frighteningly high, like 30%. And you don't necessarily have to miss your credit card payment. A policy called "universal default" lets the lender raise your rate if you miss ANY scheduled payment, like a car loan.

• Compare "grace periods" -- the time you have to repay the balance interest-free. It's typically 20-25 days, but "payment due" dates vary widely, depending on the card.

• Write "payment due" dates on your calendar and mail your check a week before to allow for postal delays.

• Recognize that the small print after all terms are laid out probably says something like "Rates, fees and terms of this account are subject to change at any time for any reason." And LOOK at those small slips of paper with the microscopic type that comes with your statement. They may contain vital (but unpleasant) information.

• If you have two cards, one with a higher balance than the other, consider transferring that balance to the card with the lower interest rate. Lenders often entice the indebted with a zero or low-interest balance transfer rate, which can save you money if you actually pay it off (without running up a new balance on the high-interest card.)

• While prizes, points and rebates are nice, don't make them your reason for choosing one card over another. Sure, they're "perks" -- which encourage you to spend more. Like carnival games: you throw $15.00 worth of balls to win a $2.00 stuffed gorilla.

So apply for that card -- it'll look great in the new wallet you got for graduation. Just try to fill the rest of the space in your wallet with pay stubs rather than charge slips. And remember that a credit card is one small part of a financial plan. The most important part? It's saving and investing enough of your earnings so you're not always fighting to keep your head above the floodwaters of debt.

Resources

Financial Basics: A Money Management Guide for Students by
Susan Knox, CPA (Ohio State University Press, 2004), $14.95

The Complete Idiot's Guide to Money for Teens by Susan Shelley
(Alpha Books, 2001), $12.95

National Association of Student Financial Aid Administrators

www.practicalmoneyskills.com

www.debtfreegrad.com