In Illinois, the state treasurer has had a unique idea to help parents save for their kids' college education. Alexi Giannoulias proposes that parents spend more money, and specifically charge their purchases on a special MasterCard credit card, in order to earn one percent back from purchases to be deposited into a college savings fund.
What a novel idea! According to Giannoulias, more credit card debt will help send kids to college. He figures that if people are going to be charging purchases anyway, why shouldn't they be putting money into a college savings account at the same time?
The idea at the heart of the Bright Start FutureTrust MasterCard idea may be a good one. Parents do need to plan early and put aside money for their children's college education any time that they can. The bad part though, is that with this plan, they are racking up consumer debt and paying out high interest rates month after month while putting away a measly one percent of their original purchase amounts. That seems a little backwards.
Giannoulias does gratuitously add that the Bright Start FutureTrust MasterCard should not be a substitute to a college savings plan, and should not be used to incur more consumer debt. Well, here's a newsflash for Giannoulias: Credit cards generally are used to rack up consumer debt.
Additionally, this MasterCard has a default annual percentage rate as high as 29.49 percent. The non-default rate for the card is anywhere from 13.24 to 19.24 percent. As a bonus to this not-so-good deal, the cards are issued with a 0 percent teaser rate that escalates to the 29.49 percent default rate the moment a good-intentioned parent is late with a payment.
For people who are able to pay off their credit card balances each month, the Bright Start FutureTrust MasterCard may be a good supplement to a solid college education savings plan. However, statistics show that especially among those with reduced home equity, Americans are falling deeper into debt by using their credit cards, so it would seem that this plan would not benefit the largest percentage of people who are concerned about establishing college savings accounts.
Also, changes in circumstances are not unheard of with all the mass layoffs and cutbacks happening. A person who normally pays off credit card balances each month could easily find himself in default and wind up owing huge amounts of interest on bills he can't pay. Eventually, filing bankruptcy could be the only way out.
As more Americans miss payments on their credit card accounts, major U.S. banks are making radical changes to their credit service agreements. Customers who are late with payments can now expect to have their interest rates raised to the maximum default rates, which in the case of the Bright Start FutureTrust MasterCard is 29.49 percent, but with other companies can be even higher.
Even consumers with good credit and excellent payment histories are being hit with these extreme rate hikes the moment they default on the credit card agreement by failing to make a payment on time, exceeding their credit limit, or bouncing a check.
The way credit card companies are cracking down on customers has not gone unnoticed by Congress. While lawmakers have generally kept their noses out of the credit card business, there is some concern from credit card companies that they could step in to stop some of the extreme policy changes and default rate hikes by the credit card companies.
Credit card giants Citibank and Chase have already announced that they will abandon their universal default interest rate hikes based on a consumer's performance on other accounts or a decline in the customer's credit score. That's not to say that the default rate doesn't kick in when a consumer is late with a credit card payment or exceeds her credit limit. The companies are simply backing off their universal default policies and minding their own business as far at their customers' credit is concerned.
So with stricter credit card policies, high default interest rates and for most, the inability to pay off credit card balances monthly, just where does Alexi Giannoulias get off proposing that parents who are desperate to save for a child's college education do so by skating on the thin ice of a new credit card account with a one percent "reward?"
Let's hope that most consumers ask this question before blindly signing up for an account that will benefit them far less than it will cost them.