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
"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
"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
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
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)