Avoid the Freshmen 15 Credit Cards

College campuses have become a prime target for banks seeking new customers.
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As college freshmen prepare to embark on their first year of higher education, there's one area that is often overlooked and poses a significant danger to their financial health: credit cards.

College campuses have become a prime target for credit-card companies and banks, which aggressively market their products at tables in high-traffic areas like student centers, libraries and stadiums during sports events. They offer free gifts like T-shirts, hats, Frisbees and other promotions for students who agree to fill out an application.

Schools receive millions of dollars from card issuers for the privilege to set up such tables and sometimes sell students' personal information -- phone numbers, e-mail addresses and home addresses -- so companies can reach out to students beyond the campus as well. Some schools offer to constantly update those lists with new recruits and new contact information for added fees.

Colleges also enter agreements in which their colors, emblems and sports teams are featured on co-branded cards with the logo of

MasterCard

(MA) - Get Report

,

Visa

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or a bank. This falsely implies that the school has evaluated the cards and considers their interest rates and other terms among the best, according to Benjamin Lawsky, deputy counselor and special assistant to the New York state attorney general, whose office is investigating lending practices on college campuses.

Card issuers also team up with fraternities, sororities, student groups or pop icons to further create a comfort level with students. For instance,

Citigroup's

(C) - Get Report

mtvU Platinum card is co-branded with

Viacom's

(VIA) - Get Report

youth-oriented MTV network, and offers "VIP tickets" to spring break or the MTV Video Music Awards.

The marketing is often effective on students - especially freshmen, who are often 17 or 18 years old with little experience handling debt and finances. With the average student receiving eight credit-card offerings during the first week of college, it's no surprise that more than half of college students get their first credit card during freshman year.

"Students' lack of financial literacy makes them more likely to complete credit-card applications without considering the consequences of credit-card debt and more susceptible to choosing cards with less competitive rates and terms," Lawsky said in testimony before the House Committee on Financial Services earlier this summer. "In addition, students' financial inexperience, together with their lack of income, leads students to incur late fees and over-limit fees."

The average student leaves school with $21,000 in debt, with credit cards taking up $2,000 of the load, according to the

Project on Student Debt

. Those with student loans have an additional $785 in credit-card debt, on average.

College students are often unaware of the long-term implications of missing payments or even how APRs and compounding interest works. A study by Ohio State University found that about 40% of its freshmen knew that missed or late payments would hurt their credit scores, compared with 87% of the general population. At the same time, students have a tendency to be delinquent on payments, leading to higher fees and penalties.

Lawsky says the debt load can be "crippling" for those who are just joining the workforce and don't have a stable income yet. In fact, late payments, high balances and high interest rates will hurt a student's ability to acquire car loans, mortgages or even employment once he graduates. That is especially true for those looking at a career in finance or the public sector, which factor credit scores into their hiring standards.

"If you make a mistake, there will be long-term consequences and it's going to cost you," says Bruce McClary, spokesman for Clearpoint Financial Solutions, a nonprofit financial advisory group. "It takes years to get rid of the stigma."

McClary suggests that parents, who often end up responsible for paying down at least part of the bill, explain the fundamentals of credit-card debt to their children long before they come before the university threshold. Students also need to be aware that while companies will make seductive offers and appear to be friendly, they are more interested in building profits than enhancing credit scores.

Steve Katz, director of consumer credit at TransUnion's

TrueCredit.com

, which offers credit scores and consumer information, affirms that late payments and other irresponsible practices can hurt a consumer's finances and have long-term effects on a credit score. But instead of running away from credit cards altogether, he suggests that parents better educate their children about credit-card basics and stress the significance of staying on top of debt.

"In today's world, it's pretty much a necessity to be credit active -- everyone's going to carry some kind of credit card or have a home or auto loan," he says. "And many people's first foray into the credit world will be as a college student."

Katz also warns of overspending, saying students should use their cards only for necessities and not entertainment or big-ticket items. But, McClary notes, when card terms are not favorable, or when students simply can't handle their spending, "sometimes it's best to leave the Frisbee on the table."