1 Anatomy of a credit card application
Plastic, please: How to get a credit card without breaking the bank
By Jenny An
Published: July 10th, 2008 | 3:45pm
Paying the bills ain’t easy — especially when you’re just starting out. Jena Owens found that out the hard way.
The Bakersfield, California, resident got her first credit card application in the mail when she was 18. She already had a full-time job and thought she could manage the responsibility, so she filled out the app and got herself a credit card.
After her first card, the applications kept the mail from all different companies and she continued accepting. In a year, she ended up with 11 credit cards and was $8,000 in debt.
When she couldn’t afford her minimum payments, she found and scored a high-interest loan of $10,000 from Cash Call LLC, a California-based loan company. Seven years later, at age 25, Owens is $50,000 in debt after paying for food, gas, vacations, holiday gifts, and everything else that came up with credit. She filed for bankruptcy when she couldn’t make the loan payments in order to keep the electricity on.
“It’s not free money like I thought it was,” Owens says.
Credit card companies know that, like Owens, people want plastic just out of high school. In a 2001 study by Nellie Mae, a student loan company, 56% of the 600 students surveyed got their first credit cards when they were 18.
High school graduates, fresh out of their parents’ houses, are the perfect credit card users for those companies too — they don’t have a lot of cash, but they have their parents to bail them out. Wanting to entice students, companies set up events or promotions near college campuses, giving away anything from pizzas to iPod shuffles as incentives for filling out applications.
In a 2006 study, the U.S. Public Interest Research Group found that by the end of freshman year, the average college student was $1,301 in debt. By senior year, that number increased to $2,623. “A bank is not interested in you paying off your credit card,” says George Cox, a first vice president at Meryl Lynch. “They’re interested in you making regular payments so they can earn interest on it.”
Many banks offer 0% introductory interest rates or annual percentage rage (APR); however, those tend to rise to 10% to 20% within a few months — especially for first-time card users. In the case of the Capital One No Hassle Cash Rewards for Young Adults, the regular APR is 14.90% beginning four months after getting the card — a rate that can change without warning too.
Along with interest, banks make money from a number of additional charges, the most common are: annual fees (what you pay every year for having the card, usually $15 to $30) and late fees (just like final papers, there are penalties for extensions on bill payments). For the No Hassle, the late fees are $15 to $39, depending on how much you owe.
Other charges include a cash-advance fee (using the credit card to pull cash from an ATM) and overage charges (if that pair of cute flats took you $1.57 over your credit limit, prepare to pay a pretty penny) — it’s $15 to $39 for the No Hassle.
With little to no credit history, those charges are what you should expect from respectable loan companies. But there are also companies simply looking to scam you. Example: First Premier Bank of North Dakota offers a card with a credit limit of $250 that, before a single purchase, slams you with $175 in charges, Cox says.
THE FLIP SIDE
But credit cards aren’t all bad. “Credit cards do help you build your credit,” Owens says. “When I was making all my payments on time, my credit was pretty good.”
She says that having good credit is important for getting a car or an apartment. Some employers look at your credit history as well.
Before getting a card, the most important thing to have under your belt is income. “If you are not saving money regularly every month, you have no business with a credit card,” Cox says.
Getting the card from somewhere you can walk or drive to also is important, according to Cox. “Get [a credit card] from a local bank so that you can go to a local bank or banker if you have any questions,” he says. “You can talk about issues as they come up.”
Despite the debt and bankruptcy, Owens says she will be getting another card in the future. For her, the pros outweigh the dangers. “It will help rebuild my credit,” she says. “And it’s good for emergencies.”
Right now, she has one emergency credit card. Otherwise, “cash is king,” she says. “One indulgence or two doesn’t have to break the bank.” If she doesn’t have the cash, she figures, she probably doesn’t need it anyway.
“Knowledge is power, and now I’ve learned my lesson,” Owens says.
Issue #24
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