Students and Credit
Students Getting Wise to Credit Pros and Cons
By RICH EHISEN
StateNet Capital Journal
College is a place where most young people begin managing their first significant adult responsibilities. Over the last decade, that has come to include acquiring credit cards, with most studies indicating that approximately 80 percent of all college students now hold at least one. With that development has come what many consider a shocking increase in student debt, as the average college student now carries an outstanding monthly credit card balance of more than $2,000.
The trend has spurred lawmakers in several states to bar or restrict credit card companies from soliciting on college campuses, with several more now considering similar action. According to the National Conference of State Legislatures, CALIFORNIA, HAWAII, ILLINOIS, LOUISIANA, MISSOURI, NEW MEXICO, NEW JERSEY, PENNSYLVANIA, TENNESSEE, VIRGINIA, and WEST VIRGINIA all enacted some kind of restrictions on campus credit card marketing in 2004. ARKANSAS and WASHINGTON followed suit this year as governors in those states signed legislation prohibiting credit card companies from plying their wares at state colleges. Many other states, including ARIZONA, KENTUCKY, MARYLAND, MINNESOTA, NORTH DAKOTA, NEW HAMPSHIRE, NEW JERSEY, NEW YORK, OREGON, RHODE ISLAND and TENNESSEE, are considering their own regulations.
Those actions, perhaps coupled with a greater emphasis by some universities on educating students about proper credit usage, appear to be at least slowing down the surge of student credit card use. According to a new report released in May by Nellie Mae, one of the country's top originators of students loans, the average outstanding balance on undergraduate credit cards fell to $2,129 in 2004, a 7 percent drop from 2003's mark of $2,327 and about 15 percent less than the $2,700 average balance in 2000.
"The fact that average credit card usage has declined among undergraduates in the past three years can be viewed as a sign that the message to use credit responsibly is reaching its intended audience," says Mary O'Malley, Nellie Mae's vice president of marketing.
That is welcome news to many who oppose college students having access to easy credit.
"I cannot think of a single positive reason to market to students on campus," says Lou Robken, a Sacramento-based CPA. "For most students it is the first time in their lives away from home, the first step toward their ultimate independence. At this point most are 18 or over and in the eyes of the law they are adults, yet most of them do not even know how to balance a check book, let alone develop a budget."
"Most students are not known for their financial savvy," says Bruce Fenton, founder and President of Virginia-based Atlantic Financial Inc. "They're just starting out, and having too much credit too fast can teach them really bad habits. What do you think the average college student buys when he gets a credit card as a freshman? Do they go to a job faire seminar? No, they more likely spend that money on recreational things, or in some other way they would not have done without the credit card. That's great for the credit card company, but not for the purchaser."
It is a habit with potentially dire and often life-long consequences for credit abusers. In an age where employers are digging deeper and deeper into an applicant's history, experts like Fenton say big credit card debt can go a long way toward keeping a new graduate unemployed, which doesn't make paying off that debt any easier. Even if the graduate scores the nice job with the big salary, bad credit can prevent them from renting an apartment or buying a car.
But some researchers question whether simply shutting off campus credit card solicitation is the best way to reverse the cycle of debt-building among some college students. Dr. Mary Pinto, associate professor of marketing at Penn State, Erie in PENNSYLVANIA, has studied student credit card use for years, and says most of the negative information about campus marketing is only anecdotal. She also says that just banning credit card companies on campus is missing the point.
"Is it a problem that companies come on campus and that they make it easier for kids to get cards that way? Yes, it is, particularly for freshman who are being exposed to a lot of things they did not see in high school," she says. "But our data does not support that it makes a difference in how many cards these kids get or in the balances they carry."
Pinto says a far bigger problem is direct mail marketing of credit cards to students, a point the Nellie Mae research supports. According to that study, undergraduates list direct mail solicitation as the primary source for selecting a credit card. Nellie Mae also backs up Pinto's fears about freshman vulnerability, noting that 56 percent of undergraduates report getting their first credit card during their freshman year.
But while credit card debt can be a significant problem, Fenton notes that there are actually some advantages to students having a card if the holder uses 30 percent or less of the card's available credit and keeps up with the payments.
"One of the few benefits of college students applying for credit is that it can help them start building a solid credit score many years ahead of those who do not attend college," says Fenton. "If a student pays their balance consistently, having a card can help their credit rating. Even if a student maxes a card out, as long as they pay it off they could actually still be better off with their credit score than the student who never got a card at all."
Statistics show that most college-age people do manage their credit fairly well, although the numbers vary greatly. Nellie Mae, for instance, reports that only about 21 percent of students pay off their balances every month, while 11 percent admit to not making even minimum payments. A recent Junior Achievement poll, however, claims that 80 percent of college credit holders pay their entire balance every monthly.
Pinto says the best hope for ensuring that a college student stays out of credit card trouble is education, both through the institution and from home. Her research shows that students who get an early education in wise credit use from their parents tend to acquire fewer cards and maintain smaller balances than those students who don't.
Many schools are also making more effort to bring their charges up to speed on credit pros and cons by offering courses on financial management for students. California State University, Fullerton, for example, offers a program that educates students on the ins and outs of personal finance -- from opening a bank account and using a credit card to financing large purchases.
Nellie Mae's O'Malley agrees that knowledge is the key in empowering students to make good choices.
"The key to financial health for students during school and after graduation is being aware of what they borrow, when they borrow and how much they borrow, and understanding the costs and responsibilities associated with all types of borrowing, including credit cards," she says.
06 June 2005
(Copyright (c) 2005, a publication of StateNet)