Pre-Approved to Pay for Life: Credit Card Debt and the College Student

If you haven’t figured it out yet, credit card companies aren’t soliciting you because they somehow heard you manage money well. Statistics show that college students receive up to six credit card offers a month promising pre-approval, low APRs, free balance transfers, and the good life. But the truth is that credit card companies will give a credit card to nearly anyone over 18 with a social security number and a pulse.
In fact, they are banking on the chance that you will wrack up a heinous balance that never dips below five figures. Credit card companies market students so aggressively because they have shown themselves to be statistically incapable of paying off their balance each month. This of course means more money for the credit card companies who are then able to charge interest on the remaining balance.

You don’t need an economic theory to explain a student’s love affair with the credit card. Of course they’re not going to leave home without it. It’s like always having a friend with you saying, “No, really, let me get this … I insist.” You have perfect intentions of paying the money back, but the immediacy of the satisfaction makes it seem like a gift. Students can buy almost anything like this while gleefully disregarding the fact that will have to pay for it at some point. But it’s not just lucrative for the credit card companies.

In his book “Priceless,” author and financial adviser Dave Ramsey cites that colleges can earn $50,000 to $100,000 per year just by allowing a single credit card company to operate on campus. “Credit cards have become a rite of passage,” he explains.

Some students want a credit card just because they can get one. But given the findings of loan providers, many schools should be applauded for doing their part to protect students from financially entrapping themselves.

According to a study done by the loan provider Nellie Mae in 2000, 78 percent of undergraduate students had credit cards and the number was steadily rising. This may not seem like an alarming figure since the national average is about the same, but what is alarming is the relative frequency with which college students like to pull out the plastic.

The cited 78 percent of card-carrying students had an average of three credit cards and an average debt totaling $2,748, not including student loans. That’s a lot of booze, food and music. While it’s almost certain that none of these people got their credit cards with the intention of racking up an alarming balance, they did nonetheless. So what happens to these people? They pay a little off every month and then they’re fine, right? No.

Here’s a scenario. Mr. I-Should-Have-Stayed-Home-For-Spring-Break has a credit card with an 18 percent APR and makes a monthly payment of between two and three percent of the balance (the average minimum payment required on most student cards). He will be paying off that credit card balance of $2,748 over 15 long, long years, assuming that there are no additional charges made during that period. But what really hurts is that he will pay as much in interest as he originally borrowed.

Such statistics indicate students’ growing comfort level with credit card borrowing and a seriously inadequate knowledge of the ramifications. If you are still considering owning a credit card, consider this. Supposing that your parents taught you well, and you can manage your money, here is a short listing of the other pitfalls you will face: changing payment dates, higher over-the-limit fees, hidden transactions fees, punitive APR increases, declining grace periods, “bait and switch” credit card offers and tiered pricing. In other words, every month you’re going to be reading a lot of fine print.

That said, many students legitimately feel that they need to have a credit card to establish a line of positive credit. This is not necessarily true. Student loans and car loans will serve the same purpose and will probably have less severe penalties and hidden stipulations. However, if you ever want to rent a car or get a good car insurance policy, you will need a credit card but not necessarily a standard Visa or MasterCard.

A great alternative is a secured credit card. A secured credit card requires a deposit with the issuing bank. This deposit amount is then used to secure a credit card and is usually only in the hundreds of dollars.

It is held as collateral while the bank issues credit of some percentage of the deposited amount which is often 100 percent. In many cases, the card is reported to the credit bureaus as a normal (i.e., unsecured ) credit card. This allows the cardholder to establish a positive credit history over the duration using his or her own money. This prevents the cardholder from spending more money than he or she has and allows a line of credit to be established.

For students that are already knee deep in debt, there is hope. Ramsey suggests that those in dept make minimum payments on everything but the smallest one, regardless of the interest rate. “For each one you pay off,” he explains, “strike a line through it and take that money and dump it into the next one, in addition to the minimum payment.” The process may be slow going, but this is one formula for stopping the “debt snowball” that many credit card users may be dealing with.