Credit Cards Can Charge You into the Poorhouse

Article excerpt

Credit card companies think it's time to "financially" educate consumers, particularly youngsters heading off to college or first-time jobs. If this sounds a bit like the fox advising his prey, bear in mind that individual banks and financial institutions handle the awarding of credit cards - and the standards can vary widely.

"It's up to [banks] based on their internal checks for prior credit histories to whom they send credit card solicitations," says Charlotte Newton, vice president of consumer affairs with MasterCard International. "There are some who really work the market."

Some institutions take wild gambles, issuing multiple credit cards to people with the worst possible financial histories. But for banks, the rewards usually outweigh the risks. With interest rates set at 18 percent or higher, the payoff is huge as long as most consumers pay up.

Credit card offers will undoubtedly fill the mailboxes of college students this fall, Mrs. Newton says. "Surveys have found that parents like for children to have credit cards when they go off to college," she says, which is why MasterCard wants to make sure students understand how to use the cards responsibly.

"We decided to go directly to college students last year," Mrs. Newton says. MasterCard and the U.S. Office of Consumer Affairs produced a pamphlet called "Kids, Cash, Plastic and You," a guidebook for helping families manage their finances. MasterCard also developed a series of TV ads warning consumers about the dangers of too much debt.

The education effort is not altogether altruistic, complain consumer advocates who point to the growing rise in outstanding consumer credit charged to banks and financial institutions. The Federal Reserve reported that consumer credit rose 7 percent seasonally adjusted in February - the most recent data available. That was the highest increase since April of last year, when credit rose 9 percent.

"I am immediately skeptical when I see credit card companies wanting to educate young people about debt," says Paul Richard, executive vice president of the National Center for Financial Education in San Diego. "What they're really teaching young people is how to spend."

What many people don't realize is that when monthly statements ask for a "minimum fee," the remainder of the outstanding charges are subject to daily interest rate fees that quickly can double the cost of the items bought if the balance is not paid.

The catch is that this is how banks and institutions make money. Some credit card issuers actually terminate contracts with people who pay off their monthly charges on a regular basis without racking up interest rate fees - or so-called finance charges.

"Marketing credit cards to college students I think is despicable," Mr. Richard says. He may be fighting a losing battle, however. Credit cards, which entered the marketplace in 1973, are firmly entrenched in American culture - even Mattel's Barbie doll carries one in the "Cool Shopping Barbie," which sells for $24.95.

Many people view credit cards as a safe way to avoid carrying large sums of cash. …