Free pizza, free coffee, and other goodies just by showing up? Why not. This is the reasoning on the minds of college students when they are approached by credit card marketers that promise these freebies for nothing. But there is a catch. When you arrive at the restaurant to booth to claim the free stuff, you’ll be asked to sign up for the credit card to get free food.

It is no wonder that the average college student has an outstanding debt of $4,100 in 2008 against the $2,900 figure back in 2004. Fortunately, measures are being undertaken to stop these tactics. Come February 22, 2010, college students will no longer be tempted by goodies offered by these credit card companies. This is the time when marketing restrictions on credit cards will take effect. It is expected that this will result to less debt for consumers below the age of 21.

Oftentimes, companies expect college students or those falling under the same age bracket to stay loyal to the first credit card they have. That’s the reason why they specifically target this segment with endless marketing ploys; sometimes going to the extent of getting this information from colleges itself for a fee. Students end up getting cards with high fees and high interest rates that can easily accumulate debt.

The amount of credit cards available to college students today has become worrisome. In fact, a significant number of younger consumers have four or more credit cards at their disposal. And only 17 percent of them said they always pay off debts in full every month.

Despite the less-than-stellar facts surrounding credit card usage, it has its good points. Some students use their cards to pay for necessities like textbooks. Another big change underway requires Americans under the age of 21 to get a co-signer if they cannot provide a proof of income. In essence, the co-signer (parent or older friend) is taking responsibility for the action of the college student.  Credit cards can also be beneficial for those under banked consumers who are continually charged huge debit card fees by their banks.

It is true that Americans still have a hard time making ends meet and paying their obligations but the pressure seems to have eased up last July. According to Moody’s Investor Service, more people were able to pay their bills in July; this is a reversal of the earlier trend wherein defaults and delinquency rates continually increased.

Charge of Rate Down

US charge-off rate on credit cards dropped to 10.52 percent in July from 10.76 in June. The charge-off rate is annualized percentage of the total outstanding principal balance that is written off as uncollectable. While the improvement may not seem like much, it is actually the first month-on-month improvement since the September of last year.

Payment Rate Up

Moody’s Index reveal that payments have risen sharply in July across six major credit card companies including Citibank, American Express, and Discover. Payment rates have even reached 17.43 percent which is the highest point since October of last year. The payment rate is measured as the percentage of total outstanding principal balance that cardholders pay back each month.

Delinquency Rate

Overall, the delinquency rate for July is 5.73 percent, the lowest level in 2009. This figure is on track with the improvements seen in the months of April, May, and June. According to William Black, Moody senior vice president, “July tends of mark an inflection point with respect to seasonal trends”. That means that delinquency may be in the horizon because of back to school expenditures and holiday spending. The amounts included in the delinquency rate are monthly balances that are over 30-days delinquent.

Projection Still Bleak for 2010

The charge-off rate is expected to hit 12 to 13 percent by mid-2010. This coincides with the expected peak in unemployment rate of around 10 to 10.5 percent. However, it is important to note that these projections are simply that: projections. These presumptions can easily change if the charge-off rate and delinquency rate lowers in the next months. Comparisons of debt relief programs tell of the same tale.

It seems that Americans who worked hard to maintain good credit will be the first hit when the Credit Card Act of 2009 becomes effective tomorrow. Already, lenders are increasing interest rates across the board. The lowest available rate is now currently pegged at 11.25 percent which is significantly higher from 8.85 percent just this January. Meanwhile, customers with less-than-stellar rating have to pay 15.75 percent, up from 13.75 last January.

According to experts, banks are setting the rates this high so they can go down from there depending on market situations in the future. Fortunately, these rates increases would no longer come as a shock to consumers. Congress has given them a leeway of 45 days to reject rate increases. Americans have the choice of paying outstanding balances at current rates in a five-year timeframe. In addition, banks need to mail credit card bills 21 days before it is due.

Various parts of the credit card law are already implemented. For example, fourteen banks have dropped double-cycle billing, where finance charges are calculated on more than a single billing cycle. Meanwhile, eleven major banks have stopped the “universal default” practice wherein rates are rates because of missed payments even with another company.

What is the Catch?

The catch of the Credit Card Law is quite apparent: increased interest rates. Eleni Constantine, the director of Pew Charitable Trusts said that it has in fact increased by 20 percent from December. While increase might seem reasonable, the level at which it was increased certainly isn’t. The borrowing costs for banks are decreasing because of market condition. By raising the rates on consumers simultaneously, they are actually deriving more profits due to larger marginal lending rates.

Overall, the gains in the new Credit Card law are certainly welcome despite certain complications. However, it is important to keep in mind that it has been designed to help consumers with high balances. People with relatively good credit should be aware of these changes and decide whether they still want to use their credit cards or pay in cash instead.

Credit card debt is not only a problem  for individual consumers, but for small businesses as well. A study conducted by the Ewing Marion Kauffman Foundation revealed that having credit card debts reduce a new business’s capability to survive over the short term. Research indicates that during the first years of operation, these new businesses experience an increase in their debt before it stabilizes.

But why would new businesses use credit cards to finance business expenses? According to Robert Litan, the vice president for research and policy at the research firm, “Small businesses’ access to formal credit market historically has been limited, a situation that has been exacerbated with the recent contraction of credit markets”.

Over a half of new companies now rely on unsecured debt for their needs because of its ready access. It is also a lot easier to get than traditional business loans. Common sense tells us that the high interests charged by the bank makes it difficult for a start-up to repay significant debt loads in a short timeframe. That’s the reason why programs like business loans, auto loans, and other traditional loans exist in the market. They have lower interest rates suitable for the intended purpose.

Before you give up on your new venture or unmanageable credit card debts, here are some tips that can help you:

Improve Your Cash Flow – cash flow is a problem most new businesses face due to insufficient capital, slow-paying clients, and improper money management. Address by loophole that is holding up collection to get cash for repayment purposes.

Aim to Pay More than Just the Minimum – paying just the minimum required is ill-advised. Unless there is no other option, consider paying above the minimum each month to lessen your debt.

Avoid Credit Card Debts – this is the most practical advice this blog has probably given. To avoid the credit card trap, be sure to avoid additional debt if you know you can’t repay it on time.