College Students And The Credit Card Crisis

Credit cards are a common part of American life. Most people don’t even think twice about swiping their card for even the most minute purchases. It is no wonder that so many Americans are in debt. It is also no surprise that the credit card companies are constantly targeting new card holders, especially college students who are just starting their lives of perceived financial independence. But is it even necessary for college students to have credit cards, or are the credit card companies simply exploiting their vulnerability?

College students are short on cash and easily fall victim to the minimum payment lifestyle that holding a credit card can provide. The credit card companies know this and readily take advantage of it. Students are offered incentives such as free gifts for signing up and reward programs for actually using the card. Cards specifically designed for students may offer features such as “no minimum income required” or “no cosigner needed.” These cards generally start with a 0% introductory rate, which is followed by an APR that may range from 0% to 19.24% (Otto).

Credit card companies have often been condemned for their unscrupulous tactics to lure naive college students into an endless cycle of debt before they even graduate and secure their first full-time job. College students can barely step foot onto campus without being bombarded with credit card offers of every kind. Some universities actually sign deals with credit card companies in order to make extra money (“They Want Your Children!”). With even the colleges on the credit card companies’ side, it’s difficult for students to not fall victim to credit cards and a life of debt.

In a further attempt to target college students, the popular social networking website FaceBook partnered with J.P. Morgan Chase in August of 2006. The partnership made Chase the exclusive credit card sponsor of the website, which is used mostly by college students. FaceBook ran banner advertisements on their site inviting users to join a special “Chase +1” FaceBook group, which amounted to little more than a promotional pitch for Chase’s new +1 card. By signing up for the card, inviting friends to the group, and taking other related actions, students were able to earn reward points to be used toward DVDs, other merchandise, or charitable donations (“Chase, Facebook Market Student Credit Cards”). It seems that nowhere is safe from credit card companies’ tactics to target young people.

But do college students really even need credit cards? Some critics argue that credit cards are necessary for students to build good credit as soon as possible. While “[a]major success of the credit card industry’s marketing campaign is in persuading students that they can only build a good credit history with credit cards,” there are other ways of establishing good credit, such as signing up for telephone and utility accounts, as well as retail charge cards (Singletary).  There are also parents who think that their children need credit cards in order to learn financially responsibility, when in reality, credit cards are more likely to allow students to become financially irresponsible (Ramsey). The average college undergraduate owes over $2000 in credit card debt, and over 20 percent of all undergrad credit card holders are between $3000 and $7000 in debt (“They Want Your Children”). If students continue to become accustom to such financially irresponsibility, the entire economy may be in trouble.

As credit cards allow people to “buy now and pay later,” people tend to spend more than they can afford on credit. In 1999, American households started spending more money than they earned. It started as a small deficit of around $50 billion, but the deficit quickly expanded to over $350 billion. “[B]ecause consumers make up two-thirds of the economy, they must keep spending to keep the economy healthy” (Walker). It may seem alright that consumers are spending beyond their means, as it puts more money into the economy right now, but if people don’t change their spending habits, they will be left in debt and be forced to declare bankruptcy, which is definitely not good for the economy.

The idea of using credit to make purchases has been around since the 1800s, though it wasn’t until the 1950s when credit cards as we know them today first appeared. In the early 1900s, oil companies and department stores issued charge cards that could be used only at the business that issued the card. These cards were developed as a way to create customer loyalty and improve customer service, whereas present-day credit cards are used primarily for convenience (Gerson). Credit cards that could be used only to purchase gas and oil were the first credit cards that were accepted all over the country, and first appeared before 1924 (“Origin and History of Credit Cards”). The first bank card was introduced in 1946 by a banker in Brooklyn by the name of John Biggins. The card was named “Charg-It,” and could only be used locally. Charg-It cardholders were required to have an account at Biggins’ bank, which reimbursed the merchant and obtained payment from the customer for every purchase made using the card (Gerson).

The next advance in consumer credit was the Diner’s Club, which was started 1950 by Frank McNamara, when, in 1949, he realized that he had forgotten his wallet when the bill came while at a restaurant for a business dinner, and decided that there should be an alternative to cash (Gerson). The annual fee for the Diner’s Club was five dollars and it was accepted at 28 restaurants. The Diner’s Club became the first nation credit card (“Origin and History of Credit Cards”). The company American Express, which began in 1850 and originally specialized in deliveries, money orders, and traveler’s checks, also created their own credit card in 1958 after noticing the success of the Diner’s Card (Gerson). This was the beginning of credit cards as we know them today.

In 1951, Franklin National Bank of New York offered a card that those approved could use to make purchases at participating merchants (Gerson). It was accepted at a wide variety of merchants, unlike the Diner’s Club card which could only be used for restaurants, hotels, and air travel. Other banks quickly followed Franklin National Bank’s cue and created their own credit card programs. The Bank of America in San Francisco’s card, BankAmericard, evolved into the credit card now known as Visa, while the credit programs of other California banks became the MasterCard.

Ever since the introduction of the credit card to American life, personal debt has been a major issue for many Americans. Because credit card bills do not have to be paid until the end of the month, people tend to spend more when using credit cards. Some companies offer grace periods beyond the billing date for the bill to be paid before charging interest, though many companies are moving away from offering this grace period. If the card holder is unable to pay the credit card bill on time, the interest will start adding up, causing the card holder to owe more than they charged in the first place (“How Credit Card Finance Charges are Calculated”). This is a major problem if they are charging more than they can afford in the first place.

Though credit cards have been a critical part of American culture for over half a decade, the credit card companies and banks are becoming irresponsible when it comes to their target markets. Credit card companies don’t care that they are causing students to go into debt before even graduating from college, nor do they care about the possible long term effects that the inevitable rise of debt and bankruptcy due to credit card usage will have on the economy.

This article was originally published at: College Students and the Credit Card Crisis

Sources:

“Chase, Facebook Market Student Credit Cards” www.marketingvox.com/archives/2006/08/16/chase_facebook_market_student_credit_cards/.

Gerson, Emily Starbuck, and Ben Woolsey “A Not-So-Breif History of Credit Cards”  www.creditcards.com/history-of-credit-cards.php.

“How Credit Card Finance Charges are Calculated” www.finweb.com/banking-credit/how-credit-card-finance-charges-are-calculated.html.

“Origin and History of Credit Cards” www.finweb.com/banking-credit/origin-and-history-of-credit-cards.html.

Otto, Stephen “How Reckless is Credit Card Marketing to College Students?” www.bankruptcylawnetwork.com/2007/11/06/how-reckless-is-credit-card-marketing-to-college-students/.

Ramsey, Dave “The Truth About Teens and Credit Cards” www.daveramsey.com/the_truth_about/credit_card_debt_3478.html.cfm.

Singletary, Michelle “Do College Students Need Credit Cards? Hardly” www.washingtonpost.com/ac2/wp-dyn/A56633-2003Aug27.

“They Want Your Children!” www.finweb.com/banking-credit/they-want-your-children.html.

Walker, Susan C. “U.S. Consumer Credit Card Debt May Crash Economy”  www.foxnews.com/story/0,2933,143037,00.html.

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