House of Cards: College students get savvy about credit

Credit cards – plastic money. It can provide the sweetest of pleasures but all too often turns sour.

For years, consumer interest groups voiced concern that young adults have quickly become the new market niche for credit card companies setting up shop on college campuses. Students, particularly freshmen, are willing and easy targets, they say, with many lacking money management skills and seeing credit cards as a way to have their cake and eat it too.

Some state governments would agree. Legislators in Arkansas, California, Louisiana, Massachusetts, New Jersey, Pennsylvania, Tennessee, Virginia, and West Virginia have introduced legislation to regulate solicitation on college campuses and require increased information about credit card usage for college students and their parents. This past year, Governor George E. Pataki signed legislation into law to regulate the marketing of credit cards on New York's college campuses and better protect college students from incurring thousands of dollars in unwanted debt.

That’s not to say that all students abuse credit cards. When used responsibly, credit cards can help teach young adults the basics of building good credit, along with how to manage money and live within a budget. And it appears students may in fact be doing just that.

According to a credit card study from Nellie Mae, a leading originator of student loans, the average outstanding balance on undergraduate credit cards fell to $2,169 in 2004, its lowest level since 1998. The study, Undergraduate Students and Credit Cards in 2004: An Analysis of Usage Rates and Trends, analyzed the credit card behavior of Nellie Mae student loan applicants during the past year.

"The fact that average credit card usage has declined among undergraduates in the past three years can be viewed as a positive sign that the message to use credit responsibly is in fact reaching its intended audience," said Marie O'Malley, vice president, Nellie Mae.

O’Malley cautions, however, that students are not out of the woods by any means. "While the sharp increases in credit card usage among college students that we have seen in recent years appear to be leveling off, undergraduate students and credit cards remain a dangerous combination," she says.

Nellie Mae's 2004 study of credit card usage and trends is the fourth in a series the company has conducted since 1998.

Among the highlights of Undergraduate Students and Credit Cards in 2004: An Analysis of Usage Rates and Trends:

An ounce of prevention
The results from Nellie Mae's credit card studies bring to light another key question: Is there a correlation between credit card usage among college students and education expenses? Apparently so. Seventy-four percent of undergraduates reported using credit cards for school supplies; 71 percent used cards for textbooks and food.

While slightly less than 24 percent reported turning to credit cards for tuition, O'Malley warns that such usage is disconcerting given the fact that variable interest rates on credit cards average roughly 13 percent. “Because student loans have built-in deferment options, low (often subsidized) interest rates, and repayment incentives for making on-time payments, they are a much wiser financing choice for qualified education expenses than credit cards," she said.

More than one third (34 percent) of students reported working 10 to 20 hours per week during the school year; 31 percent reported working more than 20 hours per week.

"The key to financial health for students during school and after graduation is being aware of what they borrow, when they borrow, and how much they borrow, and understanding the costs and responsibilities associated with all types of borrowing, including credit cards," said O'Malley.

To view Undergraduate Students and Credit Cards in 2004: An Analysis of Usage Rates and Trends, in its entirety, visit www.nelliemae.com.