Fixing the College Credit-Card Mess

(page 3 of 3)

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• Part 1: Majoring in Credit-Card Debt
• Part 2: Confessions of a Credit-Card Pusher
• Part 3: The Dirty Secret of Campus Credit Cards
• Credit Cards 101: Finding the Right Plastic
• Credit-Card Survival Guide
• Table: Credit-Card Contributions

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4. Eliminate the most egregious practices.

Credit-card companies have all sorts of ways to zap college students and others with extra charges and fees. Typically these are levied with impenetrable explanations that leave customers scratching their heads about how to avoid them in the future. Congress and regulators should take aim at the most egregious of these practices.

Start with what's known as "double-cycle" billing. The practice, which any bank executive would struggle to justify with a straight face, works like this: Imagine that a student bought a $1,000 laptop for school in August, and received a credit-card bill on Sept. 1, for the entire $1,000 amount, due Sept. 15. If the student pays $800 of that debt by Sept. 15, the student will receive a bill in October that includes interest not only on the outstanding $200 dollars, but for interest on the entire $1000 amount—even the debt that was paid. This alchemy generates interest from debts that never existed. A comprehensive bill, introduced last spring by Senator Levin, would eliminate double-cycle billing.

Another practice that Levin and other politicians have taken aim at is called "universal default." It too deserves to be banned. Under universal default, a consumer who has two credit cards and never misses a payment on one card but fails to pay the other card on time can see the interest rates charged on both cards rise. During congressional hearings, Citibank pledged to discontinue this practice, and has. However, a May, 2007, credit-card survey by the advocacy group Consumer Action found that 8 in 10 banks still practice universal default, despite public statements to the contrary.

Then there are the fees for what's known as "pay to pay." Conscientious students trying to pay off their debt are often penalized for making payments over the phone. In some instances, they are charged up to $5 just for transmitting a payment by phone. Representative Gary Ackerman (D-N.Y.) introduced a bill that would ban any fees imposed for on-time payments by phone.

Clearly, credit-card companies need to make a profit—and well they should for the valuable services they provide. But card companies make money in numerous ways, from vendors as well as from customers, and credit cards have become the most profitable arm of the banking industry. One reason is the explosion in money they've brought in from special fees and charges. R.K. Hammer, a research and advisory firm, estimates that banks pulled in $17.1 billion from credit-card penalty fees in 2006, a tenfold increase from 10 years earlier. Restrictions should be put on the most exploitative practices, to institute basic fairness, not snuff out profits.

5. Keep students informed.

Credit-card companies have wide latitude to raise the interest rates and fees they charge college students and other customers. One common clause in their contracts is known as "any time for any reason, including no reason." Give all that control, card companies at minimum should be required to notify customers clearly when they are changing rates and fees.

If a credit-card company plans to raise the interest rate it's going to charge a student, the company should be required to send the student a letter clearly explaining the change and giving the student the opportunity to pay off the balance. The note should also explain why the interest rate is being raised. Typically now, credit card companies bury a brief and confusing note about the change in the student's next bill. Information is the lifeblood of a market economy. But clear information is too often lacking in card company practices.

Legislation is just one piece of the complex puzzle of student credit-card debt. Students are bombarded with offers of credit, besieged by marketers on their campuses and at their football games. Ryan Rhodes gave us a quick look at some of the credit-card companies' creative tactics in hooking students: Proffering free T-shirts, bike rides, coupons, and sometimes iPods, credit-card companies are creatively marketing (BusinessWeek.com, 9/5/07) to more than a thousand campuses across the country.

So students like Seth Woodworth (BusinessWeek.com, 9/4/07), who after two years is still struggling to get out of debt and get back into school, are graduating with credit cards in hand and crippling debt that could potentially harm their chances of getting a good job or an apartment. And while the debt is piling on, so is the pressure on credit-card companies to do something about the problem. Irene Leech, an associate professor at Virginia Tech, decided to take matters into her own hands, raising pointed questions about the affinity contract between Virginia Tech and Chase.

There are many potential solutions. Some advocates suggest more financial literacy programs in high school and required personal finance courses in college. Others think universities and colleges should take a more active role in limiting marketing to college kids. And plenty of activists say that it's high time that elected officials and regulators take steps to address the issue of credit cards on campus, especially as the problems of indebted students grow every year. "Reform should have happened yesterday," says Plunkett, of the Consumer Federation of America.

Silver-Greenberg is a reporter for BusinessWeek.com.