How To Get a Passing Grade When You’re Unschooled in Student Credit Cards
If you sauntered through the middle of a college campus a decade ago, you might have been inundated by the art of tabling—clever marketing ploys where credit card issuers would set up booths and lure students with free swag in exchange for filling out a credit card application.
But many students were oblivious to the credit consequences of this information exchange. According to a 1999 article in Black Collegian, 20 percent of students had more than $10,000 in credit card debt.
Enter the Credit CARD Act of 2009. The humble booths, cheery promoters and free food associated with tabling neared extinction. The regulation reprimanded the aggressive tactics and required more transparent agreement disclosures.
In fact, the Consumer Financial Protection Bureau just released a report detailing a significant decline in credit card agreements between issuers and higher education institutions. In 2010, there were 1,005 agreements circulating across the country compared to just 798 last year. Issuers paid schools $73.5 million in 2010, but that figure dropped steeply to $62.4 million in 2011.
Despite the decrease in campus temptation to apply for select credit cards, Sallie Mae reports that as many as 91 percent of undergraduates have at least one in their wallet.
Students are still struggling to use plastic properly. A 2012 International Journal of Business and Social Science (IJBSS) study, “Financial Literacy and Card Cards: A Multi Campus Survey”, revealed that half of college students have four or more credit cards. Sallie Mae also found that the average undergrad still carries more than $3,000 in debt.
And parents could be the missing link to financial literacy. IJBSS reports one-third of students have never addressed credit card choices with their parents.
While these newbie cardholders can’t predict every money curveball trailing them into adulthood, it’s important to understand what drives card abuse. Additionally, parents and students together can employ some safeguards to prevent a college credit card debt cycle from taking shape.
Should Students Even Bother with a Credit Card?
Amid staggering college debt statistics, credit cards may seem like a “more-money-more-problems” option that’s better to simply avoid. But some experts note that for all their drawbacks, credit cards can be a necessity in an increasing cashless society.
“The main positive reason to start using cards in college is to build credit,” says Austin Chapman, Spokester of the Young & Free Michigan finance program through Michigan First Credit Union. “If you want to have good credit when you graduate, it’s important to start now.”
When students build credit histories, they will start to grow an entire record of borrowing behaviors. These records also act as a benchmark for lenders to determine if they demonstrate the ability to repay money for everything from a car to a house. Without a credit card to jumpstart the credit building process, students may be at a disadvantage when it comes to their future adulthood investments.
Los Angeles-based psychologist Dr. Judy Rosenberg also adds that the importance of credit cards can go beyond its credit-building benefits to provide convenience to both parents and students.
“Credit cards, although they have their pros and cons can offer a sense of security for the student in case of an emergency,” says Rosenberg. “A flat tire, or extra needed books, or any last minute unknown expenses.”
Temptation Rears Its Ugly Head
Unfortunately, temptation picks up where emergency convenience ends.
“College is expensive, and students are bombarded with marketing message that tell them they must have ‘this’ car or ‘that’ apartment and furnishings or ‘these’ clothes,” says Jennifer Gilmore, marketing and communication director of campus enterprises at North Carolina State University. “Looks can be deceiving.”
Aside from impulse control, Rosenberg suggests that the way students have been taught to handle money can make or break their card habits. If parents demonstrate bad fiscal behavior, it’s likely transmitted to the student. And some college students are not immune to the notion of money growing on trees.
“Students are new to the world of plastic money,” says Dr. Gregory Price, Professor and Chair of the Economics Department at Morehouse College. “When the money going out isn’t tangible, it’s very easy for someone new to credit to overspend.”
Without the context of money spent versus money earned, it becomes more difficult to operate within a credit card agreement’s boundaries.
“Once this cycle gets started, it’s very difficult to dig out, particularly for students that have significant expenses and limited income,” Chapman says.
These involuntary spending desires indicate that students don’t necessarily need a campus credit card booth to get into a debt dilemma.
The Parent-Student Solution
Students don’t have to resign to credit card challenges. Teaming up with parents and implementing a measure of planning can combat financial dangers before they ever set foot on campus.
Financial author of the Kids and Money Guide series, Jayne A. Pearl, says the earlier parents approach students about credit, the better.
“I’m a proponent of giving teens credit cards when they’re in high school so parents can easily monitor how the teen is using the credit card, and enforcing smart limits on their usage,” says Pearl. “That way, before they leave home, kids will be more likely to have acquired the knowledge and discipline necessary to use credit wisely.”
Ample communication doesn’t hurt either. It’s the only way to enforce guidelines of card use and it also allows parents to teach their budding undergrads lessons from their own money mistakes.
“Inform them on rules for fiscal prudence,” says Price. “Living beyond one’s means is a bad idea. Parents can share their real life examples like car payments, mortgages or grocery budgets, which had positive or negative circumstances and outcomes their kids can learn from.”
Pearl adds that parents should insist on receiving their children’s monthly credit card statement so they can address any spending issues before they get out of control.
One way to open the lines of discussion is for parents to set up a flexible, written contract that weighs the importance of budgeting alongside college necessities.
“Balance is key—like anything in life,” Rosenberg says. “Model balance and your children will learn to respect your generosity and your restraint, both of which are key to a good relationship with your child.”
Credit Card Selection Plays a Role
The type of credit card students choose can also dictate the direction of their collegiate finances. Plastic without the kind of limits and rates that reflect a credit novices’ needs may only prove to be dangerous. Instead, experts encourage comparison shopping in order to settle on the right card offer.
Chapman says that a card with a low limit that is easier to pay off every month can reduce debt risks.
“Finding the right card with the right financial institution is important,” Chapman adds.
Credit cards through credit unions tend to offer better interest rates while secured credit cards ensure that students can only spend the deposited amount as they build credit.
Schools may also provide custom payment card solutions that operate much like a credit card with training wheels. Gilmore says NC State University’s Wolfpack One Debit Card from MasterCard has received positive response from parents and students alike for its personalized money management features.
“Students, like all of us, often need the transaction mechanism of a major credit card company to make purchases in today’s world without the temptation to spend more than they have or get hit with fees they didn’t expect,” Gilmore says. “This program provides that buying power and an opportunity to manage money they already have.”
All About the Discipline
Succumbing to campus credit card tabling may no longer be an issue for many students, but the spending impulses they are faced with don’t have to defeat them right out of the gate. Between parental guidance, budgeting boundaries and careful research of monetary needs, students could land on the best credit card combination. After all, the credit card itself isn’t the enemy. When paid on time, it not only enables student credit building but also allows one to virtually borrow money at little to no cost.
“A credit card is only as good as the student’s relationship to it,” says Rosenberg. “Anything can be abused, even cash in hand. There are no guarantees.”
Students can’t be shielded from the world of credit cards forever, but taking the same desire for learning from classes and applying it to plastic could allow them to graduate into a debt-free adulthood.