College students who graduate owing thousands on their credit cards are becoming a thing of the past, according to a new report by Student Monitor, and members of the banking community are looking to cash in on this increasingly debt-less demographic.
Despite a sluggish economy precipitated by lenders who gave home loans to people who couldn’t afford them, college students remain a prime target for credit card companies. Experts say college campuses are saturated with credit card offers to lure potential young cardholders.
A 2008 survey by the U.S. Public Interest Research Group found that 80 percent of students said they received direct mail from card companies.
Fourteen states have passed laws that prohibit or restrict on-campus marketing by card issuers. Still many colleges allow credit card solicitors to bombard campuses.
Recently, a subcommittee of the U.S. House Financial Services Committee held a hearing on the marketing tactics companies use to pitch credit cards to college students. In February, Rep. Carolyn Maloney, D-N.Y., chairwoman of the subcommittee, proposed legislation to regulate credit card practices that aid college students in amassing uncontrollable amounts of debt.
Subcommittee Chairwoman Maloney said in a written statement, “Students rely on credit cards to pay for everything from books to tuition. Unfair and deceptive credit card practices hit them especially hard and cause them to rack up late fees, high balances, and delinquencies. We can and should take steps to ensure that card companies aren’t unfairly targeting this vulnerable population. Responsible students deserve a fair shake – they shouldn’t have to graduate under a mountain of credit card debt.”
According to a 2004 study by Nellie Mae, 76 percent of undergraduates have credit cards and average undergraduate students have at least $2,200 in credit card debt. That figure jumps to $5,800 for graduate students. Moreover, student credit cards typically have high annual percentage rates, often at higher rates than the rest of the population given their lack of borrowing experience.
“Through a series of public forums around the country, we brought together students and experts to discuss the growing problem of credit card debt on college campuses. At each event we heard the same: Banks and lenders are profiting off of young people’s financial inexperience, partnerships and relationships with universities and strategic and deliberate targeting,” said Erica L. Williams, Policy and Advocacy Manager for Campus Action Progress, part of Center For American Progress.
“Companies use a variety of aggressive techniques, from buying lists from schools and entering into exclusive marketing arrangements with schools to marketing directly to students through the mail, over the phone, on bulletin boards and through aggressive on-campus and near-campus tabling, Williams added.
One-fourth of the students surveyed in US PIRG’s 2008 Campus Credit Card Trap report said that they have paid a late fee, and 15 percent have paid an “over the limit” fee. Credit card companies will often impose a “penalty rate” of 30 percent or more after just one or two late payments.
Opposing preventative legislation, the American Bankers Association urged Congress to think carefully about basing policy decisions on anecdotes of debt-stricken students when it comes to how credit cards are used by and marketed to college students.
Testifying before the House Financial Services Committee, ABA Senior Vice President Kenneth J. Clayton noted that despite conventional wisdom, the vast majority of students manage their credit obligations well.
“Students handle credit as well as, and in some cases better than, the general adult population,” said Clayton. “Banks have a vested interest in ensuring that the student’s experience is a positive one, as the bank wants to build a productive, lifelong customer relationship that benefits both parties,” he said.
The report, authored by Student Monitor, a market research firm, reveals that credit card ownership and debt among college students is declining. Their average credit card balance for 35 percent of students is only $452 down $19 percent from $559 last year.
Beyond that, Student Monitor found that the percentage of students with credit cards declined from 56 percent in 1997 to 35 percent in 2008. At the same time, the percent of students with debit cards after rising from 30 percent to about 70 percent in 2006 dropped to about 60 percent this year.
Citing Student Monitor’s report, Clayton stated that 65 percent of college students with credit cards pay their bills in full each month, a percentage that is higher than the general adult population, he said.
“Today’s student population is very diverse,” he said. “Restricting access to this form of credit would result in great financial hardship for most college students and their families.”
Clayton also reminded the committee that credit cards are a valuable tool for students, serving as an entry point into the world of credit, as a means for making everyday purchases and as a vital resource in emergency situations.
With regard to marketing of credit cards to college students, Clayton maintained that most students get credit cards by visiting a bank branch to begin a broader account relationship. Referring to the Student Monitor survey, he said that only 2 percent of students obtained their cards by filling out an application at a display on campus.
As of yet, no legislation has been passed.
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