Student Buyers Beware:
Credit Cards Carry Consequences
By Ron Hatfield, former WVU Extension Service Family Financial Management Specialist; Reviewed by Pat Gruber, WVU Extension Service Families and Health, September 2014
College students have long been an easy target for credit card companies. Card companies recognized that students have limited income and lots of wants and needs and used this to their advantage. Companies offered up gimmicks and clever marketing to entice students to open high-interest credit cards.In recent years, legislation has passed to make it harder – but not impossible – for card companies to take advantage of young adults. Instead, companies have gotten more creative in their approach to target college students.
Stricter rules for credit card companies targeting students
The Credit CARD Act of 2009 was designed to curtail many of the unscrupulous tactics credit card companies were using to get young adults – mostly college students – to apply for and use high-interest credit cards.
At the time, the average college student carried a credit card debt of over $2,000, according to creditkarma.com. Debt was worsened by the fact that most college students do not have a regular income source to make monthly payments on these high-interest cards. This led to increasing numbers of college dropouts who cited the need to enter the workforce to pay off their debt. This became a larger problem once student loan payments hit after leaving college.
The CARD Act put into place restrictions on credit card recruitment activities on college campuses and set out an age restriction (21-years-old) on who can hold a card without a co-signer, among other restrictions. However, student buyers beware: the credit card companies are now finding loopholes in the law and are once again targeting college-age adults, who may not be financially sophisticated, and who, as students, definitely do not have an income that can carry this debt load.
Don’t fall for these credit card marketing schemesPrior to the CARD Act, companies offered gifts as a bonus for signing up for a card. Free pizza, t-shirts, etcetera, were all offered as incentives to get college students to sign up for a card. The new law limits gifts by companies to recruited card holders.
As a way to skirt the law, card companies are providing coupons or credit amounts on new accounts opened in lieu of physical gifting. For instance, the average card now offers a $50 credit once the card is approved. You don’t get the pizza in hand, but the pizza shop down the street will take your Visa card!
Card companies find ways to reach students off campus
The CARD Act severely limits recruitment activities on campus, so companies in many cases are blurring the line of where the campus boundary actually ends. Instead, they’re setting up shop in popular restaurants and student hangouts that are just off of the nearby campus.
Free checking or free checking?
Card companies (backed by banks) are recruiting students for free checking accounts with the knowledge that customer loyalty and in-account marketing efforts will lead to future credit card applications and high interest purchases, as soon as the bank can find a way around the CARD law with that young customer.
Financial aid refunds
Some colleges are now issuing students a Visa or MasterCard that contains the refund amount from the student’s financial aid funds. All of this occurs with very little financial education for the students on how to budget that money to last over the course of a semester.Credit card research shows that student purchases made with plastic tend to be for higher amounts than purchases made with cash. For instance, when McDonald’s placed credit card machines on their counters, the average check amount per person went from just over $4 to well over $7. Cash is out-of-sight and, unfortunately, out-of-mind!
Social media as a recruitment tool
Facebook and Twitter are the new campus recruiting stations for credit card companies. One of the quickest and cheapest ways for a bank to market to college students is through social media. Last year, Chase set up a Facebook group that gave students reward points for joining the group, according to daveramsey.com.
Proof of income
The CARD Act says students under age 21 must have a co-signer or show proof of income. The problem is—“proof” of income is loosely defined. A study by University of Houston Law Center Professor Jim Hawkins, found that 29 percent of students were able to list student loan debt as income. The card companies argue that the refund check students get is actually income for the semester and that is proof enough for them.
If parents are concerned about getting a credit rating score started for a young adult – which is almost a necessity in today’s world for renting an apartment, obtaining utility services, and getting better rates on car insurance – then a secured credit card can be the best way to go.
Parents can deposit a set amount into the secured account and the card user is then limited to that amount of purchases. By making on-time monthly payments, a student’s credit rating is then established. However, these cards still do charge high interest on balances carried forward each month. So, for most purchases, cash is till king!
A student’s financial future
As students begin newly independent lives as young adults, it is vitally important to become educated in personal financial management and make responsible financial decisions – the type of education that is not always taught in schools and at home. A young adult must keep in mind that purchases on high-interest credit cards will cost them $100s more over the long run.
Decisions made today will affect a person’s life well into the future. The instant gratification achieved by the use of a credit card today will not be worth the cost of a bankruptcy in the future. Savings and cash purchases should be the rule! The key to not being taken advantage of is to maintain control by properly educating oneself about the ways our finances get manipulated by others. Taking back control of our finances will reap great financial rewards and increased happiness in the future.
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