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Credit Cards on Campus

By — Center for a New American Dream
Updated on Jul 26, 2007

It's not only possible — but crucial — to teach teens good money habits before they go to college

For a generation where "cash is so five minutes ago" and 18-year-old basketball stars flout $90 million sneaker deals, old school values like saving and long- term planning can seem pretty fuddy-duddy. But with debt and personal bankruptcies for young adults rising at alarming rates, teaching financial literacy to our kids before they go off on their own could save them from a future of stress and frustration.

"Plastic Money" Doesn't Come Cheap

Giving young people unfettered access to easy consumer credit — before they have demonstrated the ability to manage a personal budget or obtain a full-time job — can create a host of emotional and psychological problems. The unrestrained use of "plastic money" can fundamentally undermine teens' cognitive ability to understand the relationship between income and standard of living. Poor payment habits can also lead to abysmal personal credit reports with shocking results for naive twenty-somethings: rejections for apartment rentals, home mortgages, auto loans, car insurance, graduate school loans, professional school admission, and even jobs.

Twenty years ago, who could have foreseen that college graduates would have their consumer credit scores scrutinized as carefully as their GPAs? So much for American Express saving the day. (Do teenagers wonder if Jerry Seinfeld has a problem paying his credit card bills?)

With credit lines and material expectations progressively increasing on American campuses, many teens now view consumer credit as a social entitlement rather than an earned privilege. A recent Citibank/Sony Visa campaign promotes credit cards as the "Currency of Fun," offering electronic gadgets as rewards for high levels of purchasing — implying that the more you spend, the more "fun" you will enjoy and the more "toys" you will receive. Conversely, limiting access to material goods is portrayed as depriving students of their right to pursue happiness through shopping.

Credit card companies encourage fantasies of easy money because students are so profitable: teens have financial naivete, high material expectations, responsiveness to relatively low-cost marketing campaigns, high potential earnings, and future demand for financial services. Not surprisingly, companies are approving credit lines for students at progressively earlier ages, including high school seniors. Most college freshmen now receive their first credit card before taking their first mid-term exam. Cross-marketing with retail affiliates (such as Visa-issued Gap cards) make impulse shopping even easier.

The Campus Gold (and Platinum) Rush

Since the onset of banking deregulation in 1980, the increasingly concentrated U.S. financial services industry has become more dependent on high-interest revolving credit card loans, which are about three times more profitable than the average banking product. The top 10 banks now control over four-fifths of the credit card market (compared to less than one-fourth in the late 1970s), and these trillion-dollar conglomerates are less cautious with their lending policies than the community banking systems they supplanted.

As profits from revolving debt escalated in the late 80s, the institutional pressure to expand credit card portfolios intensified. Banks began strategizing over how to penetrate the desirous but risky college market. Financial institutions learned that excluding parents from the credit approval process was a lucrative policy that increased students' discretionary purchases, leading to mounting finance charges and fees. By the beginning of the 1989-91 recession, about one-half of college students at four-year institutions had their own credit cards, but few had accumulated over $5,000 in revolving debt. This quickly changed as banks marketed credit cards to juniors and sophomores. By the late 1990s, over 70 percent of college students at four-year institutions had credit cards and banks commonly marketed them to freshmen. With more time to accumulate debt and much higher lines of credit, students began amassing much larger debt burdens, with $15,000 to $20,000 in cumulative "plastic" balances a not uncommon experience.

College administrators have not been passive bystanders. Marketing agreements have proliferated on college campuses which grant credit card companies exclusive promotional access to students in exchange for millions of dollars. This is especially common at public institutions, since the largest 250 public universities account for nearly two-thirds of the students at four-year institutions. It is noteworthy that none of the "royalties" from these lucrative contracts have been used to fund financial literacy or debt consolidation programs.

Today, three-fourths of college students have bank-issued credit cards. And, at public institutions, students commonly use their college loans (whose repayment schedule is deferred until after graduation) to pay down their monthly credit card balances — a perverse form of a savings account. This trend is encouraged by the largest credit card issuer and student loan provider, Citibank, which essentially reduces its risk by encouraging students to shift their high interest credit card debt into low-interest, federally guaranteed college loans. It should not be surprising, then, that combined student loan and credit card debt levels are ascending to new heights. In a 2001 survey of its student loan borrowers, Nellie Mae found that the average combined student debt was $20,402 — including $17,140 of student loans and $3,262 of credit card debt.

Of course, access to consumer credit cards need not entail student debt problems. If students understand the cost-efficient use of bank credit cards, having them at an earlier age may actually result in fewer debt problems later on.

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