The Young and the Indebted

High fees, high interest rates, and complex terms that come with credit cards are particularly damaging to increasing numbers of young people who use plastic.

A student at the University of Missouri.
A student at the University of Missouri.

Kali Dun, five years out of the University of Virginia, still owes thousands of dollars to credit card companies from debt she racked up with credit cards in college. On campus, she said, “[credit card companies] were everywhere…like vultures. Outside of my dorm, at football games, and in the quad. I took their teddy bears, free pizza, tote bags, and complicated, convoluted sign up forms.” But along with the giveaways and incentives, she also took high fees, high interest rates, and complex terms, and by her junior year, Kali had incurred nearly $3,000 in debt on the three cards she signed up for on campus.

High fees, high interest rates, and complex terms are among the most common credit card company practices weighing down students. They’re also practices that heighten the risk of default. And default Kali did.

Kali’s story is but one of many that Campus Progress, a project of the Center for American Progress, has heard from young people around the country. It illustrates the unique challenges that college students face with regard to credit cards.

Credit card companies aggressively market to college students. Their techniques include buying lists from schools and entering into exclusive arrangements to market directly to students through the mail, over the phone, on bulletin boards, and through aggressive on-campus and near-campus soliciting—facilitated by so-called “free gifts.”

Young people face the high fees, heavy interest rates, and complex terms that all Americans who have credit cards face. Credit cards carry substantially higher costs than other forms of credit due to myriad fees and high interest rates. The result is that many students unwittingly slide deeper and deeper into debt as they fall prey to the lack of transparency in credit cards.

This situation is particularly damaging for students because, according to a 2004 study by Nellie Mae, 76 percent of undergrads have credit cards, and the average undergraduate has $2,200 in credit card debt. And whereas in 1989, 18- to 24-year-olds with credit cards devoted 13 percent of their income to debt payments—both credit card debt and student loan debt—today’s 18- to 24-year-olds devote a startling 22 percent of their income to servicing their debt.

One in four 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.

With the price of higher education rapidly increasing, today’s young adults have not only been forced to borrow for their education, but also for their expenses while in college. While some debt is the result of irresponsible spending and late night pizza runs, large percentages of students reported using their cards for tuition, books, and day-to-day expenses, according to research by U.S. PIRG.

Major borrowing from credit card companies is like visiting a Las Vegas casino—it’s a gamble, and the odds are against you. For college students, the analogy goes a step further. Imagine that you entered the casino every time you walked out of class, or out of the cafeteria. Or if fliers for the casino were taped on the walls of every bathroom, and blackjack dealers were calling your dorm room with promises of free casino chips. The casino wants college students, and because students need the money, they don’t realize that this gamble is one that has implications for the next five, 10, or 20 years.

Not only are college students and other young people in perhaps the most vital and vulnerable point of their financial lives, their future economic health often depends on decisions made during this period. College graduates amass, on average, almost $20,000 in student debt. So between credit cards, student loans, and other loans, students can pay up to 22 cents of every dollar they earn after graduation servicing their debt.

To add to this, the economy no longer produces the same opportunities for young Americans that it used to. Today’s young adults are joining the job market at a time when incomes have been stagnant and costs for health care and retirement benefits are increasingly being shifted from employers to employees.

These and other factors paint a bleak picture of life after college. A 2006 poll of 3 million twentysomethings from USA Today and credit reporting agency Experian found that nearly half of twentysomethings have stopped paying a debt, forcing lenders to charge off the debt and sell it to collection agencies, repossess cars, or seek bankruptcy protection. The same poll found that 60 percent of young people feel they are facing tougher financial pressures than young people did in previous generations. And “the Boomerang Effect”—young adults returning to live with their parents—is an increasing phenomenon. In 2006, Experience Inc., which provides career services to link college grads with jobs, found that 58 percent of twentysomethings it surveyed had moved back home after college. Of those, 32 percent stayed for more than a year, according to its survey.

Campus Progress began engaging students around the country two years ago in a discussion about debt in higher education through our “Debt Hits Hard” campaign. The campaign focused primarily on rising college costs and student loans.

As we began that work, we realized that credit card debt and the process through which it is incurred is an equally important part of understanding the financial lives and burdens of young people. At Campus Progress, we give young people the tools to make their voices heard about the issues that affect them the most. And they speak out about predatory credit card practices and the overwhelming weight of that debt loudly and clearly.

Through a series of public forums around the country, from Broward Community College in Fort Lauderdale, Florida to Purdue University in Indiana, we have brought together students and experts to discuss the growing problem of credit card debt on college campuses. And at each event, we have heard the same: Banks and lenders are profiting off of young people’s financial inexperience, partnerships and relationships with universities, and strategic targeting.

We now know the scope of the problem. College students are in trouble, and credit card companies are partly to blame. But what about the solution?

Students are aggressively campaigning on the state and campus levels to demand that their schools abide by principles of responsible credit card marketing. They are working toward prohibiting the use of gifts on campus, keeping colleges and universities from sharing student lists with credit card marketers, and stopping student group sponsorship by credit card companies. These recommendations, coupled with efforts in state legislatures to promote responsible soliciting—such as bills under consideration in Maryland and Arizona that seek to protect students from predatory practices—are a good start toward keeping young people safe.

Congress also has its role to play in making credit card practices fairer and more transparent at the federal level. One important step would be to mandate a higher level of fairness in credit card terms and conditions by banning several of the most abusive credit card practices.

Young people who want to use credit cards responsibly currently have a difficult time determining the cards’ terms and conditions and cost-shopping among different credit cards. Those who do read their voluminous cardholder agreements often find a clause to the effect of: “We reserve the right to change the terms at any time for any reason.” Congress should mandate that card issuers give cardholders at least 45 days notice of any interest rate increases and the right to cancel their card and pay off the existing balance before the increase takes place.

Congress could also go a step further by enacting more creative ways of disclosing the most important information. This can be done by requiring credit card companies to disclose the length of time it will take to pay off an account if only the minimum payment is made. In this way, students could better gauge the long-term costs of putting debt on their credit cards.

Legislative action to protect against abuses by credit card companies is a fundamental issue of fairness and protection of America’s future—young Americans—when they are arguably in the most vulnerable and important phase of their financial lives.

Erica L. Williams, Policy and Advocacy Manager at Campus Progress Action, testified before Congress last week on credit card practices affecting young Americans. Tim Westrich, Research Associate for Economic Policy at the Center for Americans Progress, is the author of CAP’s most recent report on credit card lending, “House of Cards.”

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