By Arthur E. Foulkes
TERRE HAUTE — When Adrie started college, she didn’t have a credit card and didn’t particularly want one. Eventually, however, an on-campus solicitor for “Major Card” got her to sign up for a card membership. She was enticed by a free gift and an assurance she could cancel at any time.
The card was supposed to be used “only in emergencies,” but before long, Adrie was using it for meals, clothing and other purchases. Before she knew it, her bill had reached $1,600 and she had very little ability to pay it off.
Adrie’s story is told in a 2005 video production called “Cash Counts” by Indiana State University business education students. Her story is fictitious, but not unusual.
“Kids come into campus … and there are credit card companies giving away T-shirts and all this other stuff to get them to sign up,” said Bill Wilhelm, associate professor of business at ISU and the adviser on the “Cash Counts” project.
“We’re not different from other places. Students here get into a lot of trouble with credit card debt just like anyplace else,” Wilhelm said.
Now, under a new federal credit card law, college students and other young people will have a tougher time getting credit cards. The law also is designed to, among other things, inform all credit card users of the pitfalls of certain practices, such as making minimum monthly payments.
For example, the new law requires credit card billing statements to show how long it will take to pay off the card if only the minimum amount due is paid. The bills also now must include the payment amount required to pay off a balance in three years.
The new law also requires people under age 21 to show proof of ability to make payments before receiving a credit card. If they cannot, an adult must co-sign for the account.
“I think the new rules are going to help,” Wilhelm said. But credit card customers must still use “due diligence,” he said.
According to the Indiana Youth Institute, in 2004, 82 percent of undergraduate college students in the Midwest had credit cards with a median debt of about $1,200. Of those, 20 percent were carrying balances of between $3,000 and $7,000.
Thanks perhaps to the current economic downturn, consumers have been using their credit cards less in the past year and a half. Total U.S. consumer “revolving debt,” which is made up mostly of credit card debt, is currently about $874 billion. That’s down from about $945 billion in March 2009. According to the Federal Reserve Board, household revolving debt has been declining since the end of 2008.
President Obama signed the new credit card legislation last May. In the past six months, as card companies prepared for the new regulations, average credit card interest rates for all have increased. According to CreditCards.com, an online credit card information resource, the average credit card interest rate recently hit 14.62 percent — the highest since tracking began in 2007. The average rate was 12.17 six months earlier, the Web site reports.
Credit card fees also were boosted ahead of the new law taking effect. Some companies have re-introduced annual fees, others are adding charges for purchases made outside the United States and even fees for “inactivity.”
“The fees represent issuers’ latest attempts to mitigate the effects” of the new law, USA Today reported last year.
About one-in-four American households have no credit cards. Of the remaining 75 percent, average credit card debt has been declining since last summer. According to the credit card-comparison Web site IndexCreditCards.com, the average American household is carrying $7,394 in revolving debt. That’s down from $8,188 in July 2008.
Not all revolving debt is long-term debt accruing interest — some is paid off in full each month. Various surveys indicate between 40 and 55 percent of cardholders pay off their balances in full each month, IndexCreditCards.com reports.
Nevertheless, many people are still finding themselves in serious credit card trouble. According to USA Today, in the first quarter of 2009, credit card delinquencies hit an all-time high of 6.5 percent and credit card defaults reached a near-record 7.5 percent. According to CreditCards.com, 28 percent of people surveyed in 2008 said paying their monthly bill has become “more difficult.”
Even with the new credit card rules, “people can still fall into certain traps,” ISU’s Wilhelm noted. While card companies no longer are permitted to increase interest rates on past purchases, companies can increase rates on new charges if you are more than 60 days late paying your bill. Companies also can increase rates if you’ve signed up for a variable rate card or if the company used an advertised promotional rate to attract your business.
In short, despite the new rules, consumers still need to pay attention to details when signing up for credit cards, Wilhelm said, adding that comedian Jon Stewart recently insightfully compared the new rules to regulations passed a few years ago requiring fast-food businesses to provide nutritional information. “You’ve still got to read it,” Wilhelm said.
According to CreditCards.com, one-in-six families pay the minimum amount due on their credit card statement each month.
“The new rules are going to help,” Wilhelm said. “But if people get their card bill and they keep going to the minimum monthly payment and say, ‘To heck with the rest, I’m happy,’ they are going to continue to get in trouble.”
Arthur Foulkes can be reached at (812) 231-4232 or arthur.foulkes@tribstar.com.
