Credit cards. It is nearly impossible to function in today’s society without one. From making airline, car or hotel reservations to making purchases on the Internet, it has become essential for everyday living. And credit card companies are trying to make it easier to get one.
Competition for credit card customers has become extremely intense. Companies are looking for whatever customers they can get, wherever they can get them. Frequently this brings credit card marketers to campus, where each year there is a guaranteed new crop of potential customers. By signing up more customers earlier, the card companies hope to establish a type of brand loyalty that will carry far into the future. In the next few months, students everywhere will be offered free T-shirts, water bottles, lon g distance, pizza discounts, Frisbees, backpacks, hats, pens—you name it—all in the name of marketing credit cards. However, many students receive credit cards with no idea of the impact that misuse can have on their future.
In March 1999, the United States House of Representatives introduced H.R.900, the Consumer Credit Card Protection Amendments of 1999. Section 7 of this bill addresses the issuance of credit cards to underage consumers. One of the goals is to prevent credit cards from being issued to a consumer under age 21 without proof of independent income to repay the debt or the signature of a parent or guardian, similar to a co-signer on a loan.
As it stands now, many credit cards are issued to students with no proof of income. In general, all students need to do is provide proof that they are full-time students and they will receive credit cards.
A student can get a card on his or her way between classes. Need a VISA card? They will sign you up in the student center. Want a MasterCard? You can pick one up on your way to chemistry. But, do you ever consider how this easy credit is going to get paid and the potential negative impact on your financial future? Not usually. You may even say to yourself that you will pay the bill as soon as it comes in. When it arrives, it lists the total amount you owe and you see the box that shows "minimum payment of $20." So, you send in that minimum monthly payment—for every card you have managed to obtain in the last three years, and figure as long as you are making the minimum payment, you are doing okay.
However, according to bankrate.com, if you have a $1,000 balance on a credit card with 18 percent interest, and you merely pay the minimum balance every month, it could take you over 12 years to pay off this debt. And did you rack up that $1,000 debt buying books or emergency car repairs or trips home? Or was it the latest CDs and the last-minute Spring Break getaway? Think about it the next time you are tempted: do you really want to spend the next 12 years paying for a $15 CD? According to a 1999 study b y the Consumer Federation of America, expanding credit card debt is quickly becoming one of the most severe threats to academic success on college campuses. This study, conducted by sociologist Dr. Robert Manning, a visiting professor at Georgetown University, suggests that credit card marketing "on college campuses poses a greater threat than alcohol or sexually transmitted diseases." If you have already racked up substantial credit card debt, you are not alone. Dr. Manning’s study estimates that nearly 2 0 percent of students may have credit card debt in excess of $10,000. He goes on to indicate that many of the actual numbers are difficult to obtain due to refinancing and debt consolidation loans. Which brings up another issue—that of using student loans to pay for credit card debt.
Student loans are financing for you to pay college expenses today based on your ability to pay tomorrow. Credit is extended to you without proof of income, so you can obtain the knowledge and skills you need to increase your lifetime earning potential. This credit—which is designed to help you prepare for your future—may take you up to 30 years to repay. When you think about the fact that you will generally graduate from college with well over $10,000 in student loan debt alone, you might want to reconside r running up your credit card for that ‘must have’ item at the mall. College students and administrators have weighed in on the effect of aggressive card marketing on campus. In many instances, it has led to depression and students leaving school. Of the students I spoke with, many of them were responsible for paying their own bills, and others had their parents to pay off their bills. Some students used their cards only for emergencies, or for things they wanted, and were able to pay off their bills easil y. And then, there were the students who used the cards for survival, due to a lost job, or family situation and just got in over their heads.
Malik*, a recent graduate, indicated he got into trouble as a sophomore, and is still paying for it. He only had to prove he was a full-time student and the next thing he knew, there were credit cards in his mailbox. He received these cards and limits: VISA at $500, Sears at $900, JCPenney’s at $500 and Discover at $1,000. That is nearly $3,000 in credit for someone without a substantive job or any visible means of support! What’s wrong with this picture? At first, he used them mostly for emergencies and f amily things. But, then it became tempting to use them for items he or his girlfriend wanted like CDs, clothes, and Spring Break. He was fine paying the minimum monthly bill until a problem arose and his money got tight. Then he looked up and was several thousand dollars in debt. And, creditors were calling all the time. He was already working two jobs, so he did what he could to pay what he could. But, he feels that due to the interest that accrued, he just never recovered from those first missed payments . After graduation, he was fortunate to get a good-paying job, but then his car broke down. He needed to buy a new one, but was unable to because his credit was damaged from his college spending habits. This put him in the terrible position of having to ask his parents to co-sign on a car loan. Included in the advice he gives to students, is learn how to handle your money. "Credit cards are an evil necessity of today’s society. It is hard to get by without one, but when you get it, be careful how you use i t. The plastic is easier to spend than cash because you don’t really see it leave your pocket. It’s very deceptive in the fact that hundreds of dollars can be charged, yet a small monthly fee is required and you can’t get out of it at all…credit cards are dangerous when used without experience."
Terry* got her first card as a freshman at 17 or 18. She was ‘cold-called’ because she was ‘fresh meat’ and fell for the company’s “just-because-you-have-it-doesn’t-mean-you-have-to-use-it" line. She used it for small purchases and was on top of things until she ran into difficulty one summer and had to use it to buy food and pay rent until she could get a job. As for getting another credit card, she would not even get one if she had the resources to pay on time and in full.
Andy Jacob is president of Worldwide Financial Services in Southfield, Michigan, where he sees a lot of people with current and past credit problems. His company, founded in 1990, specializes in helping people with credit problems by providing them with second chances to have a financial life. "Credit cards are so easily accessible these days. Credit card companies are making cards available much earlier than even five years ago," said Jacob.
John* used to be one of those credit card marketers who would cold-call you over the phone. He marketed cards for several major companies and was amazed by the fact that people he did not know would actually get a card ‘just like that’ over the phone without ever meeting him. He could sell eight to 10 cards per hour by cold-calling alone. These consumers rarely asked for any type of documentation before agreeing to the credit terms.
Now, what if you are experiencing a ‘credit meltdown’? First, don’t panic. Second, create a budget with a realistic picture of how much you really owe and to whom. Set up your own payment plan with a goal. For example, if you owe $500 to VISA, promise yourself to pay a minimum of $50 per month until you get it paid off and only use it for emergencies. You should also be proactive and call your creditors before they start calling you. Let them know you are having difficulty making payments and can only affo rd to pay a certain amount per month. Then do it. They may not like receiving less than what they ask for, but it is better than avoiding your payment obligations altogether.
Here are some basic tips to help you manage your money and credit:
1. Use cash to pay for as many things as possible. Carry a set amount with you and do not exceed that.
2. Only have one major credit card.
3. Reserve your credit card use for emergencies. Car repairs are an emergency. New party clothes are not!
4. Review your statement each month and match it up with your receipts.
5. If you must travel abroad, get a card that you can use in case of emergency. The fee is worth it, especially if you need medical care or other assistance. Many companies have special services for members who travel abroad.
6. Remember: Credit cards are not for the weak of will or the low of funds. If you don’t have the money, don’t spend the money!
The major credit card issuers—VISA, American Express and MasterCard— have created special ‘student friendly’ locations on their Web sites designed to help you determine the type of card you should get, how to budget, and how to stay financially sane. If you are considering getting a card, or would like more information about your present card, you may want to check out these sites. Be sure to read the fine print! If you are already being hounded for repayment by creditors, check out what confidential stu dent crisis services are available on your campus, or contact a local credit counseling service to help you out. For a fee, the credit counseling services will allow you to write one check to them each month, and they will negotiate with and pay your creditors from that amount. In many instances, creditors will accept a lower payment amount, if they know you are getting help for your situation. Occasionally, they may defer your interest payments so that your balance will not increase. Whatever you do, take care of your credit, and it will be there when you really need it.
*All names have been changed to preserve confidentiality.
Charanne M. Parks is a financial management consultant and contributing writer.
This story ran on Black Collegian on 2002.