Jeffrey Levy started his freshman year at Cal State Sonoma, just north of San Francisco, as an architecture major. Finding that he never had cash in his wallet and never had the time to go to an ATM to get cash, he decided for convenience sake to apply for a credit card. One credit card led to two, then three then six. Before he knew it, Levy had accrued $10,000 worth of credit card debt.
Rosalynn Dang, a UC Riverside liberal studies major, similarly didn’t always have cash at hand, so she also applied for a credit card freshman year – just for emergencies – but soon began using it for regular purchases. After a few months, one credit card was no longer sufficient because she would immediately max it out after paying the bill. Dang, who had up to four credit cards at once, was soon in debt for $1,000, the average amount of credit card debt among college students.
Levy and Dang’s stories are all too common. In addition to student loan and other debt, many of today’s college students are faced with credit card debt.
Sixty-four percent of college students have credit cards and the majority of them received their credit card during the first year of college, said Daniel Drummond, spokesman for Your Credit Card Companies, a national organization of partnership for consumer credit information.
College students on average have monthly credit limits between $2,000 and $5,000 and usually each has three credit cards under his or her name, Drummond added.
According to a recent study, credit card debt among college students (between the ages of 18 and 24) increased 104 percent between 1992 and 2001.
The report, “Generation Broke: The Growth of Debt Among Young Americans,” commissioned by Tamara Draut and Javier Silva of Georgetown University, found that in 2001 it increased to an average balance per student of $2,985 from the average balance per student of $1,461 in 1992. Thirteen percent of students who had credit cards carried balances between $3,000 and $7,000 and 9 percent of them had balances more than $7,000.
Three out of four college students today are likely to carry balances on their credit cards and 30 percent of their income will be used to pay off their credit card debts, according to the research.
“Almost all of my paycheck goes to pay off my credit cards,” said Dang, now 19 and a sophomore. “But once my credit card is paid off, I just max it out again. Then my next paycheck is to pay that off and the cycle continues.”
The report also found that one in seven college students lives in a family household whose income is less than $50,000; students from these families are more likely than their peers to be in extreme credit card debt.
According to another recent study, “Consumer Finance: College Students and Credit Card Debt,” commissioned by the United States General Accounting Office, college students switched from paper to plastic for its convenience.
“I love the fact that we don’t have to pay for the stuff at that moment,” Dang said. “This
way I can wait a whole month before I have to worry about it.”
The research, which was done in 2001, found that college students enjoyed specific perks of credit cards, including:
Additionally, according to the GAO study, credit cards provide them a feeling of financial security.
“Unlike cash, a lost or stolen credit card can be replaced; and there are liability limits for fraudulent or unauthorized charges. Credit cards also offer resources in case of emergencies, such as a large car repair bill or airfare home during a family crisis,” the report found.
However, the GAO research also found several disadvantages putting so much plastic in such young hands, including:
Additionally, the GAO study found that 6.9 percent of college students carrying credit cards will file for bankruptcy before graduating from college.
“Bankruptcy can ruin a college student’s future credit report,” said Jessica Slate, the education and workshop coordinator for American Consumer Credit Counseling (a company that helps people manage their debt).
If college students file for bankruptcy, it will be on their record. That means they will need to convince their employers or anyone checking their record that they are responsible and trustworthy, Slate said.
“Yes, they can still get credit after they file for bankruptcy, but they will pay the highest interest rate,” Slate added. “It is going to be difficult to regain their worthy name.”
Jessica Antle, a spokeswoman for MasterCard, said that one of the main reasons for a college student’s debt is that the credit card is used for superficial and materialistic purposes.
“It is the culture we are living in where if you don’t have the latest things, you’re not in,” Antle said. “It’s harder for college students because they still want to wear the latest brand name clothing, but they can’t finance that lifestyle.
“They can’t work long hours because of school and the majority of their income from their jobs is used for things they need, like food,” Antle added. “Which means that they use their credit cards to pay for things they want.”
The GAO report found that 77 percent of a college student’s credit-card use is for clothing and entertainment purposes, while, only 12 percent of the time the credit card is used to pay for academic purposes, such as books, tuition or student loans.
The study also found that among the top charges to college students’ credit cards were restaurants, cosmetics, clothing and retail stores, department stores and electronic stores.
“I would go to a restaurant with about eight people and I am the only one without cash,” said Levy, now 25 and a senior at Cal Poly Pomona. “So I tell my friends to give me their money and I would charge the bill on my credit card.
“The problem became that I pocketed the cash, but it never went toward paying the credit card bill when it arrived,” added Levy, who said he still uses his credit cards for leisure purposes like dining with his friends.
Mohammed Barakat, a senior financial advisor with American Express, added: “College students get a distorted image of wealth from what they see on T.V. They should not get tied up in the bling bling of life.”
Antle also said that the increase in credit card debt among college students can be blamed on satisfying their wants and buying things they can’t afford.
“The culture of society is moving away from cash and checking accounts and moving toward plastic because of the ‘get it now, pay later’ mentality,” Antle said.
Barakat added: “Credit card debt is a consequence of a hyper-consumption society. We are continuously bombarded with advertising to buy, buy, buy and earn the money later. This is a hazard because what we develop in college can stay with us and become a habit.”
Buying a big screen television that costs $2,500 with a credit card that has 15 percent interest is an example, Slate added.
By the time the credit card is paid off, the television set will not be worth its original value, Slate said.
“It will take you seven years to pay it off with the minimum payment and the T.V. will cost you $3,900, which equals 766 hours minimum wage hours,” she said. “This shows that if you can’t pay for it in full at the time you purchase it, you shouldn’t buy it.
Slate said that credit cards tempt students to buy things they can’t afford because they tell themselves that they can pay for it later.
“They should not have this reasoning,” she said. “Only buy what you can afford.”
Another reason more students today have credit cards is the companies’ direct marketing tactics. A decade ago, credit card company booths set up on campuses were a rarity.
“The first credit card I got was on the campus of Sonoma State,” Levy said. “They had advertisements where we can get free stuff for signing up with them. Not only did they offer free stuff, but they offered credit cards with low interest rates.”
In fact, campus advertisement is the companies’ leading method for hooking college students.
According to a survey, “The Campus Credit Card Debt,” done by the U.S. Public Interest Research Group, 61 percent of college students received their credit card by filling out applications from displays on campuses, while 20 percent of college students apply through mail offers and another 20 percent apply directly through their banks.
College students applying for credit cards on campus receive a variety of perks for signing up, ranging from T-shirts, Frisbees and coffee mugs to flat fees and low annual percentage rates, the U.S. PIRG survey found.
“It’s hard for students to turn down such great offers,” said Karen Topps, mother of a sophomore attending Cal State-Los Angeles. “They think that signing up for a credit card is safe because it is offered on campus and that the school wouldn’t allow it if it wasn’t.
“Well they are wrong,” she said. “It’s not always safe and there are millions of kids that learned it the hard way.”
For many college students the problem with owning a credit card becomes how to avoid getting into debt.
Barakat said that college students’ expenses are limited: their rent is paid for and they have a meal plan. This means, in order for them to get into debt, they must be excessive spenders.
Therefore, one of the ways to avoid getting into debt is by cutting back on impulse shopping and being self conscious about spending habits.
Another way for students to avoid debt is to have a cash reserve on hand, Barakat said.
If students have unexpected expenditures, they can use the cash reserve to pay for it and not resort to using the credit card to pay for it.
Barakat said that a student should expect to have one unexpected expenditure per month.
“With a cash reserve, a student can stomach that expense and literally move on with their lives,” Barakat said. “It won’t take them six-to-nine months to pay it off.”
Many people believe that it is better to pay off the debt first and wait to have a cash reserve after they have paid off the debt. However, experts say this is not the right measure to take.
“This is two sides of the same coin,” Barakat said. “It should be done simultaneously.”
Another method, specifically for graduates, to avoid credit card debt is to continue to live frugally once they graduate and get their first job.
“Once college graduates get hot-shot jobs, they want hot shot cars and apartments to go with it,” Barakat said. “That means their car and apartment payments are sky-high and might go toward the plastic to pay for it.”
Barakat suggests that college graduates stay at home for a year or rent a cheap apartment and delay buying an expensive car so they can save their money.
There are other basic steps college students can do to avoid credit card debt.
If students cannot pay the balance in full, they should at least pay the minimum payment plus last month’s interest rate, Slate said.
“Credit cards make their money from the interest rates and they only want students to pay the minimum payment,” Slate said. “Don’t be a victim of this.”
Slate also said that college students should set up a budget or logbook for their credit card, taking into account their income, living expenses, food, utilities, etc.
In addition students should read the fine print before committing to a credit card company, Slate said.
For college students already in credit card debt, there are steps that can be taken to get out of debt.
The first step is to tell your parents and not keep it a secret. Then check who your crowd is and who you are hanging out with, Barakat said.
“Are they people who fly out to Vegas every weekend or are excessive spenders?” Barakat said.
After following these steps, the next thing to do is to call the credit card company and ask for a lower interest rate or a special monthly payment plan. Credit card companies are willing to work with the students’ parents, Barakat said.
The final steps are to pay off the debt and to pay with cash whenever it is possible, Barakat added.
“When you pull out your credit card, it doesn’t seem too expensive,” Barakat said. “When you pay by cash it will feel more expensive and you will think before you buy.”
Another way to get out of debt is to go to a credit card counseling program, such as American Consumer Credit Counseling, which can help them lower monthly payments and interest rates, consolidate multiple payments into one monthly payment and eliminate late fees or over-limit charges.
Slate also said that students should pay off debt from the account with the highest interest rate.
For more information on how to avoid or get out of credit card debt, visit www.consumercredit.com.
By having credit cards, college students are given the opportunity to build a good credit history.
These reports are checked during apartment applications and financing large purchases such as cars and homes. But employers have begun to use credit reports to determine who to hire or promote for their company.
Late and missed payments stay in the credit reports for seven years.
“Your credit report is public record,” Barakat said. “Employers use it to determine if their employees are responsible. You are building a history with your credit card and this is a great opportunity to develop good credit.
“Don’t abuse the credit card or get into debt,” Barakat added. “It will affect your future and your opportunity to get a job.”
Nila Priyambodo can be reached at email@example.com.
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