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Originally published by Student Loan News, Updates and Blog Posts » Credit Cards.

A new study to be released Monday by Sallie Mae, finds that the average undergraduate carried $3,173 in credit card debt last year, the highest recorded to date.

According to the USA Today article, the higher the grade level, the higher the debt.  College seniors who carry a credit card had an average of $4,138 in credit card debt in 2008! With the recent increases in interest rates due to the bad economy, this debt is likely to be far worse in 2009.

What does this mean?

Students are using their credit cards for more then just emergency purchases.  With the increase of tuition, gas prices, groceries, etc, students are using their cards for everyday expenses as well as school expenses.  This is very, very dangerous.  Student cards have very high rates to begin with, and it will take you years to pay off your debt once you graduate.  As we stress over and over again, only use your credit card for small purchases and pay it off in full each month.  This will not only keep you out of debt but will also help build your credit score.

What can you do?

If you are one of the unfortunate students mentioned above that have found themselves swimming in debt at an early age, don’t worry – there are many things you can do to manage your debt.  For starters, read our article “Three ways to get out of debt.”

If you are an underclassmen, apply for scholarships!  You never know when you will need the money, and this is money that you do not have to pay back!  We have two great scholarship options for you that do not cost you a thing:

Student Scholarship Search – An online directory of scholarships updated on a daily basis.

ScholarshipPoints – A free scholarship community where members earn points towards monthly scholarships up to $10,000

Take action early!  You will be thanking yourselves for years to come.

A recent student credit card survey our friends at www.ScholarshipPoints.com conducted showed that 85% of the students surveyed ranked APR as the most important factor when evaluating a credit card offer. Ask most people that same question and we bet you’d get the same answer. We think that people pay too much attention to APR without really understanding what it is.

APR or Annual Percentage Rate (the amount of interest charged per year on a loan or credit card balance) is a number that is legally required to be stated but that is not really indicative of what you actually pay.

The first reason students pay too much attention to APR is that APR only comes into play when you carry a balance from month to month in your credit cards. This means if you pay off your credit card charges within one billing period you don’t have to pay interest at all. Students worry excessively about a card’s APR and fail to understand the benefits.

We always recommend paying off your balance monthly and charging only what you can pay back. If you do this the most important factor for you is not APR but rather what are the card benefits. Here’s what I mean; I spend $300 on grocery items per month. I pay cash for them every month because I have that number budgeted. If I have a credit card that pays me back 5% cash on groceries with a 20% APR I know I can use that to buy my $300 worth of groceries and that paying it off without incurring interest is no problem. However, I also get $15 cash back which buys me a free pizza or two on the weekends. It goes the same with gas or any other reward.

Now if you do carry a balance its important to know what APR really is. APR is your interest rate but there is a difference between your interest rate and your interest charge. In simple terms, the rate is the percentage of your balance that your interest charge will be based on. The interest charge is the actual number of dollars that you pay for interest, based on your interest rate.

To make this easier to understand let’s look at the math. Strictly based upon APR if you owed $1,000 for one year at a 19% APR you would pay $190 in total divided over 12 months. Since your balance will fluctuate every month however this perfect scenario doesn’t exist. So the real question becomes, how does the credit card company calculate what balance to charge you interest on each month?

The method of interest calculation is where you can get socked if you don’t pay attention and so this is an equally if not more significant question to ask when evaluating a credit card if you plan on carrying a balance.

Credit card interest is calculated on one of three basic ways:

• Average Daily Balance. This is the most common calculation method. To figure the balance due, the credit card company totals the beginning balance for each day in the billing period and subtracts any credits made to your account that day. The resulting daily balances are added for the billing cycle. Then, the total is divided by the number of days in the billing period to get the “average daily balance.” (Tip: making frequent payments whenever you can during the month will decrease the daily balances calculated at the end of the month and save you interest charges!)
• Adjusted Balance. This usually is the most advantageous method for you. The credit card company determines your balance by subtracting payments or credits received during the current billing period from the balance at the end of the previous billing period. Purchases made during the billing period aren’t included. This method gives you until the end of the billing period to pay a portion of your balance to avoid the interest charges on that amount.
• Previous Balance. This is the amount you owed at the end of the previous billing period. Payments, credits, and purchases made during the current billing period are not included.
  
• Two-cycle or Double-cycle Balances. Issuers sometimes calculate your balance using your last two month’s account activity. This approach eliminates the interest-free period if you go from paying your balance in full each month to paying only a portion each month of what you owe. We really don’t like this method and you should try to avoid it if possible.

From answering your questions via email and in the forums it’s clear that many students do not understand much about APR except big is bad but they are missing the point for sure. Credit card companies rely on all the people who don’t pay off their charges. Responsible credit card use entails charging only what you can pay back in a month or two. If you do that APR is far less important than what your credit card can do for you!

ScholarshipPoints members looking for their blog candy will find APRISDUMB quite a tasty snack. Go to www.ScholarshipPoints.com and enter that code for 20 points! Also be sure to enter those points in the October $10,000 scholarship drawing!

On February 13th I added a blog entry titled How My Credit Score Dropped 30 Points in One Day. This entry is a follow-up to that. To summarize the original entry, I paid off and closed my Chase credit card because they were jerking me around by raising my APR because I was paying my balance off too quickly after a 0% interest balance transfer. Aside from that being a highly unethical and downright evil way to treat me, I then screwed up in trying to sever my ties with them and they socked it to me- again.

I paid off my balance plus some extra to cover the interest that I calculated had already compounded for the current month. I then proceeded to pay no attention to the invoice the next month since the account was closed and I assumed they were just going to bug me about a credit of a few dollars. Little did I know, the interest they hit me with was $3 more than I paid with left the account open. Instead of a credit I owed them $2 which I didn’t know about and so didn’t make a payment. Chase was thrilled to charge me a $30 late fee, and then another giving me a balance of $63 which was over 30 days past due. This they submitted to the credit agencies who then rocked my credit score by an average of 30+ points. luckily I use a service that alerts me when somebody dings my credit report so I was made aware of this balance for the first time. I immediately paid the balance off and then called Chase hoping for a goodwill adjustmen. I was fine with surrendering the $60 to cover being late on the $3 but I wanted them to retract the negative mark seeing as it was obviously an mistake. Their answer to me can be summed up by: “too bad, don’t try to rob us of $3 next time”. No, they didn’t want to work with me on that.

Well I’m happy to report that my score corrected itself and went back up today to just a few points less than where it had been a originally. So if you are wondering how a late payment will hurt you it all depends upon how late and how many you have. I researched how this works and here is the deal:

One late payment hurts your credit score in a major way because you could potentially go 90 days late. 90 days late is what lenders really fear because after 90 days their odds of not getting paid without going to collections skyrocket. Once its reported that the late payment was made and you are back on track in under 90 days the penalty eases up on you to show lenders you are no longer a 90-day late risk. If you have a history of being 30-days late this doesn’t work out so well, the penalty can stick for repeat offenders.

Anyway, so I’m back on track and now I can look into taking advantage of the dropping interest rates to try and refinance my mortgage and save some money each month. I was about to do that when my credit score got socked by Chase. With the economy bogging down, credit requirements are getting tighter so that’s why my score dropping was such a killer.

By the way if you are a student who will be looking at private or consolidation loans in the next 12 months, don’t wait! You should apply now before the credit requirements raise higher! You can go here to learn more about how the credit crunch is going to affect your student loans.

This is a very humbling blog post. It’s humbling but I also recognize that it’s an incredibly valuable lesson, particularly those with less credit experience than me or who are just starting out. Before I begin let me boil it down to one sentence for those of you in a hurry. READ EVERYTHING YOU GET FROM YOUR CREDIT CARD COMPANY IN DETAIL NO MATTER HOW INSIGNIFICANT IT MAY SEEM.

The Background

In February 2007 I decided to get a Chase Rewards Card in order to take advantage of a 0% APR for 6-months balance transfer option. I wanted to consolidate some smaller debts and free up some cash to pay down other debts faster. My plan was to pay only the minimum for 6-months while cleaning up the other debts and then when the normal APR kicked in I would have compounded available cash from the paid off debts to knock the Chase balance off in about 3-4 months.

I was diligent with my plan and executed it to perfection. When the regular Chase APR kicked in last summer I was ready to go and proceeded to make two consecutive quadruple payments. As I often do I called them one day to ask if I qualified for a lower APR since I was such a good customer (paid on time, more than the minimum, had a good credit score and history, etc.) The rep informed me that not only didd I not qualify for a lower APR but that they were going to move my APR from 11.9% to the maximum of 24%. I asked them why and was told it must be something on my credit report. I had a credit score of 730, no late payments in over 7 years, a great mix if credit including mortgage, auto loan and credit cards older than 10 years. The agent insisted that she didn’t know why then and there was nothing I could do about it.

I strongly suspected the reason that my APR was jacked up was because Chase made no money on me for the first 6 months due the 0% APR offer and some report revealed that I was a classic “gamer”. A gamer is somebody who takes advantage of low intro APR offers and never ends up paying the credit card company much in interest because they pay off or move their balance too fast. Companies who derive tons of money from fees and interest hate gamers.

The next day I made a balance transfer from my Chase Rewards card to my American Express and included an extra few dollars to cover any residual interest. Then since it was a new card anyway I cancelled the Chase Rewards card. I won’t have a long term relationship with a company who pulls out all the stops to earn fees off people unfairly rather than promote a lifetime business relationship.

Fast Forward to Today

All the Chase drama happened in November. I got a statement or two afterwards and tossed them assuming they owed me money and I enjoy when that happens because they owe me a few bucks and then have to spend money every month to tell me. Hey it’s a few cents every month but a small victory nevertheless.

Through American Express I have a service which alerts me of any changes to my credit report. It’s great, I like to tinker and see if I can always move my FICO credit score up but I have never received an actual alert- until today.

My alert informed me that I had a derogatory statement put on all three credit reports. I immediately logged in and saw to my disbelief that I am more than 30 days past due on my Chase bill. How can this be? I logged into my old Chase account to see that my “extra” payment made back in November was a couple dollars short of the interest charge. I had a balance of $3 which I didn’t pay for 2 months in which time it accumulated $60 in late fees and got me a negative comment on my credit report.

The credit report service from American Express allows you to also calculate your FICO credit score on the fly so I did that…30 points on average between the 3 credit agencies. My credit score got blown out of the water from this one thing!
I immediately paid Chase online and then called them to see if there was anything they could do about the negative report to the credit agencies. They passed me around to a couple of different people before informing me: Too bad, late is late and it’s your problem not ours.

So Chase got the last laugh. I now have to work even harder to get my score back up. I’m hoping the change will not be permanent and in a month or two when the balance shows I paid them their $3 and the account is closed it reflects that. I’ll let you know. In the meantime here again is the lesson learned.

READ EVERYTHING YOU GET FROM YOUR CREDIT CARD COMPANY IN DETAIL NO MATTER HOW INSIGNIFICANT IT MAY SEEM.

This goes doubly if you’re a gamer and move balances around frequently! Oh and I would personally not recommend getting involved with Chase for any number of reasons mentioned in this post.