STUDENT CREDIT CARD TRAP
Introduction
Key Findings
Recommendations
Methodology

INTRODUCTION  

In 1998, credit card companies are expected to mail over 3 billion credit card solicitations to consumers. These “you’ve been pre-approved” pitches promise a dream of low-cost credit, even though most consumers who take the bait, and then manage to qualify, are switched to higher-cost cards within 3 months after the teaser rate expires. 

But the direct mail avalanche, even at levels guaranteed to destroy entire forests, isn't enough to reach one of this extremely profitable industry's key targets: college students. Despite their lack of existing credit (and their lack of income, generally a key criterion for other potential customers) the industry, attracting by their lifetime profit potential, wants college students. 

Direct marketing doesn't work because college students don't have much credit built up already, which means they don't have credit reports. The industry uses consumer credit reports to derive the pre-screened ("you've been pre-approved") mail and phone call lists that it generally relies on to recruit new customers. 

So, instead of cutting down trees and burning up the phone lines to reach college students, the credit card industry goes hunting right on campus. At tables outside the bookstores and student centers, alongside the student volunteers recruiting new members or raising money for charity, paid credit card company representatives eagerly make their "buy now, pay later" pitches while they hand out small bags of junk, frisbees and freebies, candy and soda (2-liter bottles!) to students, hoping to entice them to fill out credit card applications. 

College administrators are concerned. Some colleges have banned the practice. Others have ratcheted up credit education programs. Student credit card debt is increasing and the students who can't pay end up in the credit card trap. 

In the spring of 1998, PIRG student volunteers surveyed 1260 students at 15 representative campuses around the country to obtain information about student credit card practices. This report summarizes the results of that study. 

KEY FINDINGS 

Most students surveyed (69%) obtained credit cards in their own names, while the others (31%) said that their parents either paid their primary credit card bills or co-signed at least one of their cards. Of those who obtained cards in their own names, only 15% reported holding a full-time job when they applied. 

Thirty-eight percent (38%) of the students responsible for their own cards report paying their balance off each month. Thirty-six percent (36%) pay “as much as they can.” However, the remaining students responsible for their own bills -- more than a quarter of the total -- report that they pay either the minimum only (16%) or pay late (9%). 

Overall, students responsible for their own cards had average unpaid balances of $968, however students who reported carrying over a balance had unpaid balances of $1,366. 

CREDIT CARD MARKETING ON CAMPUS 

More than half of students (61%) responsible for their own bills reported they had obtained cards at campus tables while fewer than half of those who reported that their parents helped with payments (41%) obtained cards at tables.  

Students reported obtaining gifts ranging from T-shirts and Frisbees to coffee mugs, slinkees, and candy or bottles of soda in return for filling out applications at tables. Students reported that campus groups sponsoring the tables often received either flat fees or “per-application completed” payments from the credit card companies as well. 

STUDENTS WHO OBTAINED CARDS AT CAMPUS TABLES HAD MORE CARDS AND HIGHER BALANCES THAN THOSE WHO HAD NOT. 

Students responsible for their own cards who obtained cards at campus tables had more cards (2.6) than those who had not (2.1) and higher unpaid balances ($1039) than those who had not ($854). 

More students responsible for their own cards who obtained cards at campus tables reported carrying unpaid balances (42%) than those who had not (35%)  

Those students responsible for their own cards who obtained cards at campus tables and carried balances had higher unpaid balances ($1460) than those who had not ($1206). 

PAYING LATE AND TAKING CASH ADVANCES 

More than one quarter of all students (28%) reported paying late at least once in the last two years. This finding is especially troubling since many banks now extract "penalty" interest rates of 22-28% from consumers who make 1-2 late payments in a year. 

The same number (28%) reported paying using cash advances late at least once in the last two years. One quarter of these  reported using a cash advance to pay another unpaid debt. 

CREDIT CARD EDUCATION INADEQUATE 

Only 41% of all students found credit card education materials "helpful" or "somewhat helpful." The remainder found them not helpful or unreadable. Some students were harshly critical of “small print” and “deceptive legalese.” Other students stated that telephone calls to or from credit card companies were only to obtain payment or aggressively sell add-on credit life insurance, not to offer advice on paying down debts. 

Over one-quarter of students (26%) found introductory "teaser rates" misleading. 

The survey asked students how long it would take to pay off a $1,000 credit card debt at an 18% Annual Percentage Rate (APR), if you only paid the minimum balance due. Using a generous 3% minimum payment (most credit cards require less) only 20% of all students guessed the correct answer, six years. The most common answer was 10 years (37%). An additional 19% guessed 8 years and 15% guessed 4 years. 

In addition to the $1000 paid off, the student would also pay $559 in interest. A $2500 debt could take 34 years to pay off, with total payments of over $10,000, including over $7500 in interest. 

USE OF CARDS 

While 79% of all students reported using credit cards for multiple purposes, from campus expenses to shopping, only 13% reported limiting credit card use to emergencies. 

 DISCUSSION OF CREDIT CARD DEBT 

 It's not hard to figure out why credit card companies are on campus. They've virtually saturated the older adult card market and now are looking for new populations to serve. College students represent an extremely profitable under-served market, especially compared to other under-served markets, which include sub-prime high risk potential customers, such as previous bankrupts. One other profitable market the industry is re-targeting is the extremely affluent, with new platinum and other high-limit offerings. 

But college students are a key target. One recent industry article reports that students who get a card early will retain it for a longtime. That's why Citibank is marketing on over 1400 campuses and American Express Optima on nearly 1000. The article estimates that students have current disposable income of $80 billion ("Card Issuers Go Back To School To Capture College Customers," Card Marketing, June 1997). 

But this increase in student credit card debt is coming at a troubling time. According to recent government data, credit card debt doubled between 1993 and 1997, to over $422 billion. Debtors with low incomes, including college students, are among the fastest growing new users of credit. 

Worse, interest rates on many common campus credit cards are very high, even higher than industry averages. For example, according to its Internet site, Wells Fargo's student card rate is 20.05%, with a rate of 22.05% for cash advances. Although ATT Universal Card's student rate is "only" 17.9%, that's higher than its current disclosed regular rate of 15.8%. Students who miss a payment jump to 23.9%. After its teaser expires, the American Express Student Optima Card rate goes to 18.4%. 
 

 RECOMMENDATIONS FOR COLLEGES, STUDENTS, AND  CONGRESS 

College administrators are starting to show concern about credit card marketing on campus and rising levels of credit card debt. At least two colleges -- Widener College (PA) and Niagara University (NY) have reportedly banned credit card marketing on campus. A recent news article reported that at least one college -- Indiana University -- has made a credit card debt seminar part of new student and parent orientation. "This is a terrible thing," said administrator John Simpson, "We lose more students to credit card debt than academic failure." (The Chicago Tribune, 16 August 1998. 

PIRG recommends that college administrators take the following actions: 

Colleges should review the practice of allowing the firms to pay student groups a fee based on the number of applications filled out (rather than, for example, receiving a flat fee for the use of their tabling privilege) since that leads to overly-aggressive marketing. One student, who testified before Congress about her credit card debts, said she got the credit card that got her in trouble only because a fraternity friend said they were planning a keg party with the $1 per application they received. 

Colleges should prohibit credit card companies from offering trinkets to students for filling out applications unless the student  has first read a credit card education brochure prepared by either the college or a non-profit credit education organization.  Colleges should include credit card and debt education materials in brochures inserted in bookstore shopping bags. Colleges should review and consider limiting the total number of credit card tables allowed on campus each semester.  

Credit card and debt education and counseling sessions should be made a regular part of campus programming, including new student orientation programs. 

RECOMMENDATIONS FOR STUDENTS

The following is a summary of recommendations for students included in a new PIRG fact sheet 

Consider the risks and benefits of credit card debt, before you apply. Think about the risks, and whether you really need the card. 

One national credit card is all you need to help you build a credit record, if you pay it off on time. You can build a credit record without carrying an unpaid balance. 

If you must carry a balance, always pay as much as you can afford, every month. Never pay only the minimum balance, or you'll have trouble paying down the card. 

RECOMMENDATIONS FOR CONGRESS 

Do not enact industry-supported, unbalanced bankruptcy law amendments currently before Congress, which would, among numerous egregious provisions, force bankrupt consumers to pay off more high-cost credit card debt, even in circumstances where the lender made additional, risky loans to unqualified consumers who had already exceeded reasonable debt limits. 

Instead, enact HR 1975 (Joe Kennedy, D-MA), which would strictly regulate the disclosure of introductory teaser interest rates that typically jump from 4.9% or so APR to 17-20% after 3 months. The bill would also prohibit numerous onerous credit practices, including charging consumers who pay off their full balances on time a punitive fee. Such practices encourage carrying high cost credit card debt. 

Require credit card bills to include a monthly calculation describing how long, in years and months, it will take to pay off your credit card if you make their recommended minimum payment, at current interest rates, if you never use the card again. 

Hold hearings on rising levels of student credit card debt. Disappointingly, Congress has not held hearings on the problem since Rep. Joe Kennedy did in 1994, when he chaired the House Subcommittee on Consumer Credit. 

 Prohibit the mailing of unsolicited credit cards, even cards that are unactivated. At least one bank, First USA, is exploiting an apparent loophole in the Truth In Lending Act's long-standing prohibition on mailing unsolicited credit cards, by sending out phone cards with an unactivated credit card feature that can be turned on with a phone call. 

METHODOLOGY 

 PIRG student volunteers asked students with credit cards to fill out surveys in student centers in the spring of 1998 at a representative sample of 15 college campuses around the country, including large and small, public and private, 4-year residential and 2-year community colleges (UCLA. Colorado State University, University of Southern Colorado, Eastern Connecticut State College, the University of Connecticut, Trinity College (CT), Indiana University, Smith College, the University of Maryland, Rutgers University, Oberlin College, Lane Community College (OR), Portland State University, the University of Oregon and the University of Wisconsin. Over the summer, a survey was distributed randomly to students working in PIRG offices around the country.