It’s only $12.99 for a pizza for you and your buddies.
But add it to the $350 charged for textbooks, and the $35 for concert tickets and the $49 for new shoes, and opening the monthly credit card bill can be a shocker. There’s no way to pay the full balance off this month.
Can today’s college students really expect to graduate after four years (and maybe more) of higher education without amassing card debt?
Probably not. According to research conducted by Nellie Mae, a Massachusetts-based originator of student loans, 76 percent of college undergraduates began the school year in 2004 with credit cards. And the average outstanding balance was $2,169.
When students finally graduate from college, they’re eager to start earning huge salaries to erase the debt they racked up in the last four years. But that doesn’t always happen.
Maureen Morris, a counselor at Community Credit Counseling Specialists, located at 624 Main St in East Toledo, says she sees it all the time.
“We see people out of college not getting the job they thought they would with the income they thought they’d be receiving. And they have all this credit card debt on top of the student loans. When they become due, they’re inundated. They can’t manage. They’re living beyond their means. It’s become a nightmare for young people. I had one in here yesterday in tears,” she said.
Morris says the average credit card debt for young people who have graduated from college is between $10,000 and $15,000.
A study conducted in 2004 by Demos, a non-partisan public policy research and advocacy group, showed that the average credit card debt among young adults age 25-34 increased by 55 percent between 1992 and 2001. The study, “Generation Broke: The Growth of Debt Among Young Americans,” showed that the average card-indebted young adult household now spends nearly 24 percent of its income on debt payments, four percentage points more, on average, than young adults did in 1992. The study further showed:
Among young adult households with incomes below $50,000 (two thirds of young households), nearly one in five with credit card debt is in debt hardship – spending over 40 percent of their income servicing debt, including mortgages and student loans;
Young Americans now have the second highest rate of bankruptcy, just after those aged 35 to 44. The rate among 25-34 year olds increased between 1991 and 2001, indicating that Gen Xers were more likely to file bankruptcy as young adults than were young Baby Boomers at the same age.
According to Nellie Mae, college undergrads reported the freshman year as the most prevalent time for getting credit cards, with 56 percent reporting having gotten their first card at the age of 18.
“Its big business for credit card companies,” said Beth Carpenter, executive vice president of service and administration at TPS Credit Union, Inc., producing a thick stack of credit card offers sent to her own daughters.
“Many teenagers receive stacks and stacks of offers, a number of them duplicates,” she said.
“The credit card companies send them multiple times, thinking that eventually, they’re going to get their attention,” Carpenter said. “They feel that if they get their initial business, then they’ll likely maintain a financial relationship over time and continue on.
“And if they don’t pay their bills, they’ll get them in late and other fees,” she added.
Undergrads who make it to freshman orientation without a credit card will likely have more opportunity when they get to campus, finding offers tucked into textbooks, delivered to physical and electronic mailboxes, and posted on almost every bulletin board on campus.
And many credit companies set up tables in the common areas of college campuses to encourage students to sign up for credit cards. Often, they give away T-shirts, water bottles, Frisbees, coffee mugs, etc. as a “signing bonus.”
“Some colleges have been instituting policies to keep the credit card companies off campus,” Carpenter said. “But the companies are bold. They will work at a pub across the street off campus, hire students to solicit other students, paying them $10 per application. It is big business for them.”
Why do credit card companies target students, despite the fact that they often don’t have jobs and are also borrowing student loans? According to Nellie Mae, research reaffirms Carpenter’s theory that student borrowers are valuable customers because they tend to stay loyal to their first card, continuing to make purchases for many years to come.
Knowledge is power
“The only way college students can get through all the enticements is by being financially educated.
“We are working with UT through the Northwest Chapter of Credit Unions and they find a very big need for financial education,” Carpenter said. “They’re seeing these students coming in and they’re inundated with these offers and they don’t know what to do with them.”
In fact, “Staying Debt Free” was the topic of a program presented to incoming freshmen at The University of Toledo by Dr. Linda E. Bowyer, associate professor of finance. The university will also host “Finances 101,” a financial education program sponsored by the Northwest Chapter of Credit Unions for high school students Oct. 18.
Carpenter’s advice - parents and students should go over credit offers together, if possible.
Morris agrees that it’s important to read the fine print before signing the credit card application. Credit card companies often promote introductory interest rates of 0 percent for 12 months to hook new customers, adding that once that period ends, people can suddenly find themselves paying 21 percent interest rates, she said.
“They think they’re going to pay off their debt in 12 months, but they don’t,” she said. “They’re going to overspend, and credit card companies are going to make money off of them.”
“If you miss one payment, it can go into a default interest at 31.2 percent,” Morris said. “And if you’re charged a late fee or over-limit fee, you can pay anywhere between $29 and $39 per month.”
Some credit card companies offer small credit balances of $300 for a $3 membership fee, and an annual fee of $39, she said. “If you miss a payment, they start hitting you with late and over-limit fees. I have seen a $300 balance go to $1,300 or more. And they do not charge them off to a collection agency. I have seen many of them come in like that.”
A necessary evil?
Chosen with good information and guidance, credit cards offer a number of advantages to students.
Like loans, using credit cards wisely – that is charging and paying off balances monthly - can help build a positive credit history, enhancing the ability to receive a private student loan, buy a car, rent an apartment, get a job, and eventually, try to buy a house.
“They also offer peace of mind for college students and their parents,” Carpenter said. “There’s security in emergencies.
A credit card also provides a convenience factor in today’s increasingly cashless society. “Many times students are buying books, clothes and other items online, and they have to have a secure way to pay,” Carpenter said.
In over your head?
One concern is that students might sign up for the cards and forget about them, creating a concern for identity theft, Carpenter said.
There’s also a concern that they will get into credit card debt.
“It’s critical to keep an eye on spending,” she said. “A $10 pizza, a $25 logo T-shirt and $12 for a movie ticket can add up.
“It’s a red flag if the charges add up to where the student can’t pay them off at the end of the month,” Carpenter said. “Is it worth to buy pizza for your buddies that you’re paying for 10 years later because you can only paying the minimum payment every month?”