The Predatory Nature of Student Credit Cards

The following is a guest post by Garrett Driscoll from Debt Eagle.

When the first credit card was invented, it was all about convenience. In the 1950's a man named Frank Macnamara came up with the concept after forgetting to bring cash on a night out with friends. Always carrying money was cumbersome and a credit card solved that problem. At that time credit card companies made their money with transaction fees and yearly fees. Up until the 80's credit cards were seen simply as an easier way to pay for things. As people become more accustomed to their cards they started to be used more like an income substitute. They began buying things, when they didn't have the funds to cover it. They could always make the minimum payment, and pay the rest later. The yearly fees became less important as the industry realized they could make much more by keeping their customers in a constant state of debt.

I've personally never carried a balance or missed a payment. You would think, i would be an ideal customer for the credit card companies. But customers that pay on time, don't make them any money. They've shifted their focus to target populations with appetites for things they can't afford. This brings us to the student population. From loans to credit cards, a college student's existence is bursting with debt. For students, credit cards have become what ARM's were to homeowners back in '08. The industry extended credit to a population they knew didn't have the means to pay it back. They made money by creating debts that would take years to pay off. Low introductary rates lured students in, and the fine print tells them the rates will skyrocket in six months. This type of lending hasn't recieved the attention that the mortgage industry has, but it is no less predatory. The credit industry was singling out a demographic that for the most part didn't even have an income.

In 2010 more than 80% of all students carry a balance of over $2000. With the barrier to getting a credit card being set so low, students have no trouble obtaining a card with a high limit. In fact they get free t-shits, pizza, and ipods to go along with their shiny new credit cards. But by the time they are ready to graduate, they could have accumulated debts that will take them decades to pay for. As they join the work force, they will have to deal with serious student loan and credit card problems. With a struggling economy and poor job prospects, this could become a real mess for new grads.

The government has made efforts to crack down on the sub-prime mortgage industry. But, are they doing anything to stop the direct targeting of students with these types of credit cards?  The answer is yes. Our government has recently taken steps to curb this type of behavior with the CARD Act of 2009 (which took effect in Feb. 2010). This act has put new laws in place aimed at keeping financially naive students out of debt. One new law requires those under 21 to have a co-signer (unless they prove they have income). This is important because it will keep parents in the loop. If they want a credit card, their parents will be forced to monitor it. The 2009 Act also bans all the free swag and incentives kids get to sign up. There will be no more ipods or t-shirt giveaways on campus. Credit card companies will still be allowed on school grounds, but they are no longer allowed to entice students with free goodies.

These new rules will help, but they really don't address the root of the irresponsible spending. People aren't born financially responsible. And lenders shouldn't be profiting at the expense of our students. Huge debts, a ruined credit score, and a bad job market don't bode well for new graduates. Grads think they'll be able to get a good job and pay down debt quickly. But, right now those high paying jobs are hard to come by. Financial education is so important and schools need classes that teach practical financial skills. Info about credit scores, interest rates, and loans provide real world benefits. In 2002 the "jumpstart coalition" gave surveys to determine high school students financial literacy. Over 68% of them failed this basic test. This report also showed that 60% of students believed that they didn't legally have to pay their credit card debt. Most of them did not even know what their credit score was or why it was important. If these students understood basic financial terms, maybe they would learn to read the fine print. A great place to point students for basic financial education is Project Cash on the University of New Hampshire's website. It has free information about credit, savings, and college financing (http://www.projectcash.unh.edu). It can help teach students the true costs of careless spending and may give them the education to stop accumulating debt.

Comments

[Michael Gardner]

Financial education begins at home. Of course, if parents are fiscally irresponsible, it's no surprise that their children learn bad money habits.

The CARD Act is a good start. What really needs to happen is to ban credit card companies from college campuses entirely--no ifs ands or buts. The reason they cater to college students is that a credit card is a rite of passage into adulthood. It leads one to assume you are a mature person. Ah, the tangled web of deceit that is advertising.

And never mind keeping parents in the loop so they can pick up the credit card bill when the kid doesn't pay. How about parents saying "NO" or "Get a job" rather than co-signing for their kid's indescretions.

[KH]

I don't think we can say that college students are childlike, naive, especially idiotic, or that they should be a protected class.

Rather, young people in college have brighter futures and are usually more intelligent and have more resources than their peers who are not attending college.

College students are also mostly above the age of majority. They can join the army without parental permission and kill people, for example. They are usually 18 or 19 to 23 or 24 or older. They are not children by any means.

It is also clear that many adults not in college and of many different ages are financial idiots--taking out loans with ridiculously high interest rates, and mortgages they cannot pay, and overspending with credit cards.

Perhaps we should institute a "moron" law? That stipulates that anyone who is an idiot can't take out a loan or have a credit card?

I favor instead encouraging *everyone* to be careful and make good financial decisions, or live with the consequences.

A "special" law for college students doesn't make any sense at all.

[Eric]

Yup, I take insult when people group all college students together as stupid or irresponsible. That's just moronic in itself.

[Joel Gray]

It is extremely important that college students do not begin their independent lives with a staggering credit card balance. Think of the implications for our society. While some students are fully capable of managing their finances especially with a credit card, these students are really few and hard to find.

Highly debatable concept but very informative article.

[Mike Z]

"In 2010 more than 80% of all students carry a balance of over $2000." Really? I don't believe that.

I also do not support more government intervention to tell us what they think is best for us. We don't need a nanny state. The problem is when people vote to re-elect representatives in congress that are in favor of big bailouts.

The big banks knew they were too big to fail. They took risks that they otherwise would not take in a truely free capitalistic economy. Now, we, the tax payers, are suffering.

If the credit card companies want to lend money to students without incomes, then let them. But when those students cannot afford to pay the balances back, DO NOT bail out the lender.

[MelMoitzen]

When you talk about a bailout, it's hard to put aside why college students were traditionally a great marketing target for card issuers. Not only because of their financial naivety resulting in huge interest and fee revenue, but also because the card issuers counted on a virtually guaranteed bailout in the face of defaults. Not from the government mind you, but from the Bank of Mom & Dad outside the realm of legal responsibility for the debt.

As a student, it's a really sweet deal when (unsupervised by your parents) you only had to cough up perhaps $15/month as a minimum payment on your own account while continuing to run up hundreds of dollars of fun & games expenses month-after-month. The student may have also had his parents' credit card for authorized purchases--books and emergencies, which the parents had no problem covering. The interest rate and accumulated balance on the student's card not only were meaningless to the student, they were unknown to the parents until the damage had been done.

That's where the BMD bailout would come in--typically knowing nothing of the student's credit card account until months or years later, when the credit line is maxed out, the creditors are knocking on the student's door, and the larger minimum payment is no longer manageable. Hard to say no when your student hits you up at just the right moment--like immediately after presenting you evidence of some academic honor. "Oh, yeah, there's something else I need to tell you about."

There were always students who handled their own credit cards responsibly or paid their way through college entirely on their own without parental help; there were always parents who thought it would be more appropriate to let the student deal with the consequences of their spending. What's different now is that a lot of branches of BMD simply no longer have the means to provide a bailout in this economy...especially when their kids are in college.

[Stephan]

i defintiely dont think banning credit cards from campuses is the way to go, we need to teach students how to use cards the right way. why ban them, and once they graduate give them access to credit with absolutely no exprience on how to use them the right way. all we would be doing is avoiding hte problem until people graduate college. we wouldnt be fixing the underlying problem, and that is personal finance education that should be part of every high school curriculum. I used a credit card throughout college, no balance, always paid off. and like mentioned above, let the lenders fail if they give credit to students who dont deserve it.

[Brent]

This has probably changed greatly in the last few years, but I recall reading a survey where 50% of college grads from certain prominent universities expected to be millionaires within 5 years of graduation. No wonder many of them thought that a few grand in credit card debt was no big deal. Parents need to teach their kids about having realistic goals and planning accordingly. That should not include hoping that you win the lottery or create the next big startup.

My parents drilled into my head through out high school to pay my balances off in full every month and that I shouldn't buy anything I cannot afford to buy in cash (excluding home purchases obviously).