As Colleges Limit Marketing Of Credit Cards, Issuers Push High-Fee AlternativesMany colleges have tightened rules on credit-card marketing on campus in order to discourage students from racking up huge amounts of debt. Now another kind of card is being pushed on campus -- with its own set of issues.
This fall, financial-services companies are focusing more of their campus marketing on "prepaid debit cards," which work like standard debit cards except that they aren't linked to a traditional checking account. Among the issuers aggressively marketing their cards this year: U.S. Bancorp and Wal-Mart Stores Inc.
The cards typically carry hefty fees and offer fewer consumer protections than credit cards. Fees are often charged when the card is activated, when it is used at an ATM and even when there's a lack of transaction activity.
They also offer less protection than credit cards do when a card is lost or stolen. If a missing prepaid debit card is reported within 48 hours, cardholders are not responsible for more than $50 in unauthorized charges. Yet if reported two to 60 days afterward, cardholders could be held accountable for up to $500 dollars in unauthorized charges. After 60 days, users face losing their entire balance. With a lost credit card, users face a maximum $50 liability, regardless of when the loss is reported.
Another drawback: The cards don't help users establish a credit history, as they are not considered a line of credit. That may hurt students when they look for an apartment or shop for private student loans down the road.
On the plus side, it's virtually impossible to incur an overdraft with prepaid debit cards. And students can't get into thousands of dollars of debt, as they can with credit cards. The average college graduate carries $2,748 in credit-card debt, according to a 2007 survey by student lender Nellie Mae. And nearly one in four graduates leaves school with more than $5,000 in credit-card debt, according to a recent survey by Zogby International that was commissioned by credit reporting agency TransUnion Corp.
Prepaid cards are making inroads as a growing number of colleges limit how credit cards can be marketed on campus, in order to protect students from runaway debt. Tulane University, Georgia Institute of Technology and the University of South Carolina, for example, forbid credit-card companies from soliciting on campus. The University of Arizona allows only merchants that are sponsored by a university group.
But financial institutions are still permitted to promote student checking accounts and prepaid debit cards on most campuses. In addition to fliers and T-shirt and cupholder giveaways, banks and other card issuers are increasingly using technology to reach the student population.
Facecard, a prepaid debit card offered by Iowa-based MetaBank, a unit of Meta Financial Group, promotes its MasterCard prepaid debit card through the social-networking site Facebook, as well as its own Web site, Facecard.com. The card allows users to swap money between friends online and monitor spending over the Internet and via their cellphones. An average of 5,000 cardholders are added every month, according to Ed Braswell, chairman and CEO of edo Interactive, which developed the card.
Although there's no fee for using it for retail purchases, the card imposes other costs. There's a $1.50 fee for ATM withdrawals, in addition to whatever fees are charged by the dispensing bank. There's also a $4.95 monthly inactive-account fee if the card goes unused for more than 90 days. Additionally, cash and checks cannot be uploaded to the card, only money through bank accounts or other credit and debit cards.
Facecard is being promoted at orientations, merchant fairs and other high-traffic events for freshmen at 50 colleges this semester. Among the enticements: "prewards," coupons that offer incentives to shop at marketing partners. For example, a student would receive a text message notifying her that a local restaurant has loaded a $2 preward onto her Facecard, redeemable only at that restaurant. The student would then head to the restaurant and presumably spend more than $2.
Retail giant Wal-Mart Stores is also making a bid to court campus consumers. Its new Student Money Card, backed by GE MoneyBank, a unit of General Electric Co., is actually two cards -- one issued to a parent and another to a student. Parents can then monitor how much money is spent and where it goes from another location. They can also add money to the card.
There's a one-time charge of $7.46 to activate the two cards, along with a $4.94 monthly fee that is waived if the account balance exceeds $1,000. Cardholders pay a $2 ATM withdrawal fee, plus whatever the host bank charges. They can, however, withdraw up to $100 per transaction when making a purchase at a Wal-Mart store without incurring any fees.
For parents with accounts at banks like U.S. Bancorp and National City Corp., the Visa Buxx prepaid debit card may offer a way around some of the fees. Like Wal-Mart's Student Money Card, both the parent and the student receive a card and can track spending online. Students cannot spend more than what's in the account, but there are several charges: a $10 enrollment fee ($15 for non-customers), a $2.50 bank teller fee, a $2 inactive-account fee and a $10 overdraft fee, which can occur if a charge isn't processed immediately. Transactions at bank-owned ATMs are free, but there's a $1.50 fee for non-bank ATMs.
So far, the Buxx card has been marketed to parents, according to Brian Triplett, global head of prepaid products for Visa. Since it was designed primarily for high-schoolers, there hasn't yet been a major push to sign up cardholders on college campuses.
Students who opt for debit cards should investigate their bank's overdraft policies and fees, say experts. "It's unlikely that the first offer that shows up in the mail is the best out there," says Ben Woolsey, director of marketing and research for Creditcards.com, an online credit-card marketplace. "The same goes for cards that are marketed on campus at events. Like all consumer goods, comparing before buying is a good idea."
When Laura Palazzolo, of New Hyde Park, N.Y., entered New York University this fall, she says she was bombarded with offers for debit cards from area banks handing out fliers on campus.
She hopes to avoid using plastic too much. "I'm really trying to be careful," says Ms. Palazzolo, 18. "It's a little overwhelming when [companies] target you because you're a freshman." For now, she's using a student checking account she set up through her parents' bank that comes with a debit card.
By: Mary Pilon
Wall Street Journal; September 11, 2008
