Finance 101: Credit Crash Course

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November 11, 2008

2:57 AM

Marissa Bonhomme ’10 pays for her meals, books, parking tickets and other expenses with her own money. She has worked for her mother’s IT and Telecom consulting firm in Northern Virginia over summer breaks, and at Williamsburg Prime Outlets during the school year. Like many students, she watched the nation’s financial crisis develop, wondering how it might affect her and her peers.

Recently, she found out.

Bonhomme, who uses her debit card almost exclusively, was charged about $700 in overdraft fees after a check she deposited into her account took several days to process. While some banks only charge a percentage of each purchase as a fee, her bank, Suntrust, charged her $35 each time she used her card.

“They never told me the card was overdrafting, and the overdraft protection on my savings account didn’t even work,” she said.

She is not alone. Nationwide, overdraft and ATM fees are on the rise as financial institutions struggle with heavy losses. According to the Associated Press, the average fee for using another bank’s ATM has risen to $3.43, a 13 percent increase from last year.

Many other students at the College of William and Mary have also been affected. In a recent survey on debit and credit card usage conducted by The Flat Hat, 20 percent of students that reported having overdrafted on their checking account also reported that their fees have increased over the past three months. One student complained that he was never informed by the bank about the overdrafts on his account. Another respondent wrote that a bank had not fixed a glaring problem with his or her account, despite repeated attempts to contact the bank.

Christina Scott ’11 has a similar story. Last week, she was told that she overdrafted on her checking account by $100, and had to pay a fee of similar cost to her local bank in New Jersey. Scott said that part of the problem was that she spends personal money for philanthropy events run by her sorority, Kappa Alpha Theta, and then is slowly reimbursed. Many other students at the College also use personal funds for expenditures on behalf of student organizations, making checking account overdrafts more likely if a student is not careful. Often, these horror stories can be avoided by doing careful research and keeping a watchful eye on account balances, but it’s not always that easy. For many students, credit cards are a convenient alternative to risking costly overdraft fees from debit cards and checking accounts.

But many banks and creditors, once eager to dish out credit cards to anyone, are now being more careful. In some cases customers are required to build up credit before they can open or apply for a card. This proves difficult for college students because establishing good credit scores generally means spending responsibly for several years and earning a consistent income that can be used to pay off monthly credit card bills.

“It’s not like credit card companies are sending out pamphlets to inform students about how things really work,” Bonhomme said, adding that she has frequently inquired at banks about opening a credit card account, but has been turned down due to tightening standards.

“It used to be that you could use your parents’ credit to help improve yours, but now you often have to start from scratch,” she said.

Credit scores — which are essentially numerical definitions provided by credit bureaus of how responsible an individual has been in terms of paying bills on time and repaying loans. It’s easy to see why this is challenging for full-time students to do by themselves.

There are still benefits to possessing and using credit cards, in addition to avoiding costly overdraft charges from a debit and checking account. Responsible credit card users can rack up points to help pay off student loans, reduce insurance premiums in the future, and qualify for better loans on cars or mortgages.

But increasing fees and interest rates — according to MSN Money, the average annual percentage rate (APR) has risen above 12 percent — put the irresponsible spender in greater peril than ever, particularly when debt continues to accumulate, and college students often lack the money-making means to pay off these debts quickly.

As one student wrote in The Flat Hat’s survey, “The credit crisis hasn’t really affected the way I spend. I think it’s going to play out more for me personally once I’m out of college.”

Responsible spending now can ensure that this effect is as minimal as possible, at least from a credit standpoint.

Part of the problem is the number of credit cards that many people own. According to Bankrate.com, a website specializing in financial rates and data analysis, most Americans carry between five and 10 credit cards, and a small number carry as many as 50. As companies struggle with losses, folks that have multiple cards with high balances can be deemed of “higher risks” to the financial institution. One respondent wrote that while one of his cards started with an 8.9 percent interest rate — three points lower than the national average — it was raised suddenly to 29.9 percent overnight because of the risk assessments of the company.

“This is a common practice for credit cards,” the student wrote. “Most people don’t know about this possibility.”

Here at the College, we seem to be doing slightly better with credit cards compared to the national average. Only four out of 319 respondents reported having more than three credit cards listed in their own names, while 40 percent said they only have one. Forty-four percent of respondents do not have any credit cards that is registered in their own names.

Experts point out that maintaining a good credit record now is essential to avoiding debt and hassle in years to come. Creditors will penalize young people who close cards too quickly because a better offer happens to come along. Even today, creditors have begun limiting the abilities of college students to raise their lines of credit based on assessments that haven’t proven themselves and they don’t have full-time incomes.

And what advice do others for people to learn from their horror stories with debit accounts?

One survey respondent advised, “You should teach people how to not spend money that they don’t have.”
Or, as Bonhomme advised, “Keep your money in a sock. It might be safer.”

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