Credit CARD Act to protect young consumers

Credit card debt has been crippling many Americans for the past decade.

It's estimated that Americans have $900 billion charged on their credit cards today.

"I have two credit cards and I pay off the balance every month," said Christina Stotts, a sophomore nursing major from Brookland.

Stotts said she uses her card for food and gas in order to get the reward points they offer, but said that if she makes a large purchase she won't use her card for those things until it's paid off.

Beginning Feb. 22 the Credit Card Accountability Responsibility and Disclosure Act of 2009, or Credit CARD Act of 2009, will go into effect.

The act is designed to protect consumers by giving new rules to credit card issuers about how they are allowed to solicit new customers and how they should handle existing customers' accounts.

The new rules include:

• Issue notices of account modification at least 45 days in advance.

• Increase rates only on new charges, while applying the old rate to exiting balances.

• Deliver credit card bill at least 21 days before payment due date.

• Protect consumers under the age 21 by making them show that they are able to make payments or have a cosigner, in order to open a credit card account.

While these new rules are to help consumers, some reports, including one from the Jutia Group Web site, a site managed by finance professionals, said the new rules will cost the banking industry as much as $50 billion in lost revenues.

Also there are loopholes in the new rules. For instance, credit card companies can't raise rates on existing balances unless the payment is 60 days late, but they can raise rates on future purchases at any time, as long as they give consumers a 45-day warning.

Also the prohibition against raising rates applies only to fixed-rate cards, not variable-rate cards. New fees and penalties on existing balances can also be applied.

Dan Marburger, economics professor, found information that was shocking to him in the recent Sallie Mae credit card report "How Undergraduate Students use Credit Cards."

The report compares credit card usage from 2004 with credit card usage of 2008. According to their report, 84 percent of undergraduates have credit cards compared to 76 percent in 2004.

What are students buying with their credit cards?

The report shows the number one expense in 2008 for students with credit cards was food at 84 percent. Clothing with 70 percent came second and cosmetics with 69 percent came third.

"Students are only using their credit cards on fun stuff," he said. "The here today gone tomorrow stuff."

Marburger said that credit card companies are able to sucker in college students by advertising their cards as a way to pay for things such as restaurants, clothes and entertainment. He also said that credit card companies use the minimum payments trap to keep students paying on their card for years.

"They (credit card companies) want you to pay the minimum balance because it's going to take you a long time to pay it off," he said.

Marburger said that with the standard high-interest rates credit card companies have for college students, it could take years for students to pay off their debts.

"I asked my students if they knew what their interest rate was and not one of them knew," he said.

Using a credit card debit calculator he found online, Marburger figured out that a student paying the minimum rate on a balance of $3,178, which is the average debt for college students, with an annual percent rate of 20 percent, would take 38 years to pay off.

"Keeping in mind you're never going use the card again, you'll pay $12,000 in interest on that credit card," he said. "What students don't know that if you miss a payment your interest rate goes up."

Marburger said his best advice to students is not to get a credit card and live within their means, but if they must get one to only use it for emergencies.

"When I was in college you couldn't get a credit card. You had no choice but to live with your means," he said. "I was 32 before I had a credit card and by then I knew how to manage my finances. This is something credit card companies never want you to figure out."

For those who are in debt, Marburger advises to pay as much as you can get by with on the balance.

He also said he'd like to see economics be a part of the First Year Experience courses so that students can learn how to manage their finances.

"I think of my daughter who is about to come to college. She sees all her friends going to Olive Garden and she can't. She thinks that that's not fair," Marburger said. " Yeah, they're going to the Olive Garden, but they'll be paying for it until they're 40."