Over the past 20 years, credit card companies have actively solicited young consumers, particularly college students, in an effort to enroll new cardholders. Despite the recent enactment of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act,) which was intended to curb questionable marketing and lending practices targeting consumers under the age of 21, card companies continue to engage in disturbing practices as they endeavor to sign up college-aged cardholders.
Becoming aware of such practices is the first step young consumers and their parents can take to avoid the trap of credit card debt.
Parents should not be surprised if their 18-year-old college freshman receives credit card offers in the mail. In fact, card companies can use students’ email accounts to send them offers. As long as the card company obtains the students’ contact information from a source other than a credit bureau, the CARD Act allows the continued solicitations.
Some card companies are also offering discounts, reward points, and promotional credit terms via social media to attract young consumers. Such offers may be enticing, but young consumers should carefully consider the financial responsibilities and potential negative consequences that can be associated with credit card usage before deciding to become a cardholder.
Many college-aged consumers think they will be a different kind of cardholder than they actually become. For instance, several young consumers may initially intend to use a credit card only in the case of emergencies, but studies indicate that only 13 percent of student cardholders report limiting their card use to this purpose. The vast majority of student cardholders (79 percent) used their cards for other purposes, including campus expenses and shopping.
Many young consumers think they can afford to be a cardholder because they have the financial means to pay the minimum amount due on their monthly bill - which can be as low as $25. But what they don’t realize is that when they make only the minimum payment, they not only incur interest charges that can ultimately be extremely costly, but they also increase the likelihood of incurring penalty fees and higher default interest rates for late payments.
This so-called “revolving debt” has been associated with a variety of detrimental consequences ranging from increased levels of stress and anxiety to decreased academic performance. Late payments can plague young consumers’ credit reports for seven years, which can negatively affect their ability to obtain future credit on favorable terms.
There are a few steps that college-aged consumers can take to help protect themselves from these and other negative consequences:
Parents can also help to protect their children from the pitfalls of credit card debt through their words and actions:
Using credit cards is an important undertaking that can significantly impact young consumers’ financial and personal futures. To help protect themselves, college-aged consumers should seek financial advice and guidance both before and after they obtain a card. In many cases, parents are a good starting place to seek such guidance.
Eboni S. Nelson is an associate professor of Law at the University of South Carolina’s School of Law, where she is currently focusing on young consumer credit card indebtedness. She also serves as Chairperson of the South Carolina State Advisory Committee to the U.S. Commission on Civil Rights.
All statements and opinions expressed on this blog are those of the individual contributors, and not of the Bill & Melinda Gates Foundation or NBC News.