Don't Break the Bank: A Student's Guide to Managing Money (21 page)

Prepaid Cards

A prepaid card is just what it sounds like. You buy the card by paying an amount upfront, and then you have credit in that amount (minus any fees) available on that card. You can buy prepaid cards with a Visa or MasterCard logo at supermarkets and major retail chain stores. When you buy the card, you usually get a temporary card right there. You can only use this card in limited places and may run into challenges because it doesn’t have your name on it. Usually, you can pay a few dollars to have a permanent card (with your name on it) sent to by mail.

Prepaid cards eliminate the possibility of getting buried in debt or going overboard on your shopping. They also are less risky than using your bank cards—if the card is lost or stolen, someone cannot access your bank accounts with it or rack up a ton of charges in your name. The downside is that prepaid cards do not help you establish or build credit at all.

Student Prepaid Debit Cards

PayPal™ (the service that allows people to send money electronically) recently started a student debit card program. Parents set up the debit account, and the student gets a MasterCard® debit card with his or her own name on it that can be used online or in stores. Anyone 13 or older can get a card. It›s a prepaid card, so the user can only spend the amount that›s in the account. If the balance is too low, the card just won’t work. However, a cool thing is that parents can transfer money into the account instantly—online or via their cell phone—which can come in handy in case of an emergency. Parents can also set up recurring payments, for example, if they want to give their student a certain allowance every week. For more information, check out
https://student.paypal.com/
(click on the “student account” link in the bottom right corner).

Other student debit cards include the PASS card from American Express® and the Student UPside Visa® Prepaid Card, but be sure to check to see if there are monthly or annual fees.

The CARD Act and What It Means to You

The Credit Card Accountability Responsibility and Disclosure Act (CARD Act), which became law on May 22, 2009, gives consumers more detailed information and expanded options in the area of credit.

As a result of the Act, consumers get:

• Safeguards against rate increases

• Improved billing practices

• New fee restrictions

• Increased disclosures

• New protections for consumers under 21

Safeguards Against Rate Increases

• Under the Credit CARD Act, rate increases are prohibited during the first year and promotional rates must last for six months or longer.

• The Act prohibits “double cycle billing,” where credit card holders are charged interest on debt that is paid on time during a grace period, and “universal default,” where a lender changes a loan from the normal to the default terms when the consumer defaults with another lender.

• After the first year, cardholders must be notified of significant changes to the terms of an account 45 days before the changes take effect. New rates may not go into effect for 14 days after the notice of change is mailed. The consumer will also be afforded the option to cancel the account and pay off the balance at the existing rate.

Improved Billing Practices

• The Credit CARD Act allows consumers 21 days to pay their monthly credit card bills (compared to the former minimum of 14 days).

• Payment due dates must fall on the same day of each month.

• Consumers must be allowed three weeks between the time a bill is mailed and the time it’s due.

• Under the Act, credit card statements must appear in a specific font size for easier readability.

Fee Restrictions

• In almost all cases, consumers can’t be charged for the method they use to pay their credit card bill (by check card, phone, mail, etc.).

• The Credit CARD Act limits fees consumers can be charged for spending over their credit limits.

• There are new limits to the fees consumers can be charged on subprime cards.

Increased Disclosures

• Consumers must be provided with disclosures about how long it will take them to pay off a balance if only minimum payments are made.

• Credit card agreements must be available to consumers online.

• Under the Credit CARD Act, billing statements must include the payment due date, the minimum amount due, the ending balance, and detailed information about late fees.

Protections for Consumers Under 21

• Under the Act, consumers under 21 will only be able to get a credit card with proof of their ability to make payments independently or the help of an adult co-signer.

• The Act restricts incentives given to students who sign up for credit cards.

You can read more about this at
http://www.practicalmoneyskills.com/
.

Quiz: What’s Your Credit Card I.Q.?

Answer TRUE or FALSE:

1.
Credit cards are accepted as cash by stores.

2.
Most credit cards have a credit limit.

3
. If I pay my credit card in full by the due date, I will not owe any interest.

4.
There’s no penalty if I pay my balance after the due date.

5.
If I pay the minimum monthly payment, then I won’t owe any interest.

6.
Credit card companies charge merchants a percentage of the price of anything purchased with a credit card.

7.
My credit report contains information on bills I have not paid.

Answers:

1.
Credit cards are accepted as cash by stores.

TRUE
. Actually, credit cards are a type of loan. You borrow money from the bank. The bank pays the store.

2.
Most credit cards have a credit limit.

TRUE
. Card holders may charge only up to a certain dollar amount set by the card company. The limit is set based on your ability to handle debt.

3.
If I pay my credit card in full by the due date, I will not owe any interest.

TRUE
. If you pay the entire balance within the grace period allowed (usually about 28 days), you will not owe any interest on your purchases.

4.
There’s no penalty if I pay my balance after the due date.

FALSE
. Credit card companies charge late fees to card holders who do not pay their bill by the due date. Not paying your bill on time can be costly. Most credit card companies charge $25 or more to credit card users who fail to meet their deadlines—regardless of whether you pay the minimum due or the whole balance. In fact, you could pay a $35 penalty fee on a $15 balance.

5.
If I pay the minimum monthly payment, then I won’t owe any interest.

FALSE
. After you subtract the minimum payment from your balance, finance charges will be added to your remaining balance. So avoid the minimum payment trap. Pay your bill in full, or as close to in full as you can. The minimum payment is the least amount of money you can pay if you want to keep using your credit card. If you pay less than the minimum payment, the credit card company will often “turn off” your card so that it cannot be used to buy anything more. The card will not work again until you have made your minimum payment.

6.
Credit card companies charge merchants a percentage of the price of anything purchased with a credit card.

TRUE
. When you use a credit card to make a purchase, the credit card companies charge the merchants a percentage of the sale.

7.
My credit report contains information on bills I have not paid.

TRUE
. Actually, your credit report contains a lot more than that. It contains some vital non-credit facts such as your name, nicknames, maiden name, marital status, spouse’s name, social security number, year of birth, current and previous addresses, current and previous employers, and estimated income. Plus, it contains detailed information for each credit account you hold, including the type of account, when it was opened, the credit limit or loan amount, the balance you still owe, and whether you have been late with any payments. It also includes information such as lawsuits, bankruptcies, and liens against your property.

Final Words of Wisdom

• Be wise with your credit. Make sure you understand exactly
how not to use a credit card
, including avoiding only paying the minimum payments, which is a very common misconception. Also, treat your credit card as though it were cash, and don’t dig yourself into debt. The last thing you want is to graduate with thousands of dollars in credit card debt to add to your student loans.

• At the same time, if you can remain disciplined, don’t avoid a credit card altogether. Many avoid it thinking that it’s the safest and smartest way to go, especially if they already have a debit card or cash. But in reality, the
best way to build credit history and improve your credit score rating in college
is to get a credit card, use it, and pay it off in full every month. Then, upon graduation, you will be at the top of creditors’ lists when compared to your fellow graduates.

• Don’t underestimate the power of passive or side income. Not only can it help you get through college without financial stresses, but it can easily turn into a full-time business. For example, consider some of the top
side business ideas
out there in which you might be particularly passionate about. Running these businesses on the side can create some great income, develop your working skills while still in college, and set you up for an awesome career.

~Andrew Schrage, editor of
MoneyCrashers.com

Part VI

Money U: Paying for Your College Years

College brings lots of new experiences and challenges—and plenty of new financial issues to consider. Not only do you have tuition bills, but you may also need to pay rent, buy groceries, and afford expensive textbooks. We’ll tell you how to apply for financial aid and scholarships to help pay for college, and we’ll also share tips on managing your new assortment of expenses.

Chapter 11

Financial Aid and Scholarships

As a college student, financial aid will play a very big role in your life. It may determine where you go to school (or if you can go at all). It will also be important in helping with your college costs and taking some of the expense (and pressure) off you and your parents. But there’s a lot of paperwork and red tape involved, and there are also some deadlines that are non-negotiable. So, you need to learn as much as you can about the financial process and the options available to you.

Types of Financial Aid

It’s important to learn about all of the types of financial aid so that you don’t miss out on any that you may qualify for.

Your EFC plays a very important role in the financial aid process. The EFC (Expected Family Contribution) is the government’s way of determining how much it thinks your family can pay for your college expenses. The higher the EFC, the less chance you have of financial aid. Your EFC is determined by the information you and your parents provide when you submit your application for federal financial aid (FAFSA).

Grants