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8(1), 2010
EXECUTIVE SUMMARY
The increasing levels of college students credit card debt are raising alarm among parents, educators, news outlets, and various government agencies. The purpose of this study is to explore credit card debt and use by undergraduate students and examine whether gender and household income have an effect on that use. The study found that undergraduate students credit card debt levels are no different than that of the general public and students gender or household income, with some exceptions, had no effect on credit card debt and use. Keywords: Student credit cards, Student Debt, Credit Card usage
INTRODUCTION
College students access to and use of credit cards has been studied by researchers and covered by the news media for many years because their potential misuse can cause harsh consequences such as uncontrollable debt, low credit ratings and forcing some students to find work to pay their bills, negatively affecting their attention to their academic work, delaying their graduation, and even their decision to stay in school (Tan 2003). According to Sallie Mae, undergraduate students are carrying record-high credit card balances. Twenty-one percent of undergraduates had balances of between $3,000 and $7,000 in 2008 with an average balance of $3,173, the highest in the years the study has been conducted. The median debt grew from $946 in 2004 to $1,645 in 2008, an increase of 74 percent from $946 in 2004.Also, Sallie Mae 2008 Survey showed that only 15 percent of freshmen had a zero balance, down dramatically from 69 percent in the fall of 2004. The median debt freshmen carried was $939, nearly triple the $373 in 2004. Seniors graduated with an average credit card debt of more than $4,100, up from $2,900 almost four years ago. Close to one-fifth of seniors carried balances greater than $7,000. Demos. Org 2008 study indicated that the average college graduate has nearly $20,000 in debt; average credit card debt has increased 47 percent between 1989 and 2004 for 25-to 34 year-olds and 11 percent for 18- to 24- year olds. Nearly one in five 18- to 24year-olds is in debt hardship, up from 12 percent in 1989. Credit card companies have offered college students incentives to obtain and/ or to increase their available balance limits. These incentives and other credit card issuers practices has been the subject of both state and federal scrutiny. Furthermore, excessive use of credit cards can leave students with a heavy debt burden upon graduation if not before. FinAid.org estimates that about two-thirds of four-year undergraduates leave school with debt. College graduates with low credit scores will have difficult time getting credit in the future and may even lose some attractive job opportunities. On the other hand, credit cards can be a convenient method of payment, a helpful tool for learning financial responsibility, and a resource in case of emergencies (Lawrence, et al 2006). Also, credit cards are used by students to make airline and other travel related reservations, and manage large debts such as auto and student loans. Sometimes, credit cards are the only way students can afford to pay for a large portion of their educational and other living expenses.
THE SAMPLE
The data was collected through the use of an anonymous questionnaire that was given to students attending various classes at the Craig School of Business (CSB) at California State University (CSUF) during the spring 2009 semester. The questionnaire had 24 questions that included 5 demographic questions related to a respondents gender, ethnicity, household
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STUDY FINDINGS
Table 1 show that over 80 percent of respondents use at least one credit card regardless of their gender or household income. These numbers are in line with other research findings. For example, Sallie Mae, the largest student loan company in the U.S., in their 2009 study of college students credit card usage found that 84 percent of the students sampled nationwide had credit cards in 2008 (91% for those living on the West Coast) compared to 76 percent in 2004 and 67 percent in 1998 and that half of them had four or more credit cards up from 43percent in 2004 and just 32 percent in 2000. The Jump$tart Coalition for Personal Financial Literacy, a leading promoter of financial literacy among high school and college students, found that about 67 percent of the 1,030 full- time college students participating in a national survey conducted in 2008 have at least one credit card. Lyons 2004 study showed that 79 percent of sampled students at the University of Illinois had at least one credit card. Noble, 2002 in her survey of students attending the University of Mississippi, found that 54 percent of them had one card and 27 percent had two cards. TABLE 1: Number of Credit Cards Used by Students Zero Gender Male Female Household Income Less Than $40,000 $40,000 to $80,000 Over $80,000 19% 16 One Card 39% 25 Two Cards 24% 31 Three Cards 13% 14 Four or More 5% 14
19% 17 14
30% 33 37
28% 26 27
15% 13 11
8% 11 11
Table 1 also shows that 5 percent of our male respondents used 4 or more cards compared to 14 percent female students. Jump$tart 2008 survey showed that 7.3 percent of their sampled students used 4 or more credit cards. It is interesting to note that in our survey the 39 percent of males who use one card far exceeds the 25 percent of females who use one card. The opposite is true for those who use 4 or more cards. The percentage of females, 14 percent, is significantly higher than the 5 percent for males with a p-value less than .0005. This agrees with prior research findings that college female students tend to have more cards and shop more frequently (Armstrong & Craven, 1993, Michael McCall & Donald W. Eckrich, 2006, Hayhoe , C. R., Leach, 2000, and McCall, 2004). However, that does not mean that they carry higher balances on their cards. According to Table 6 there is little difference in the percent of male and female responding students at the various levels of credit card balances. Armstrong and Craven, 1993 found that women were more likely than men to have credit cards but they carried lower balances. They argued that women may have a better understanding of credit cards and their finances. Noble, 2002 found that credit card limits, interest rates, special offers, and parents and friends experience in choosing a credit card company were not significantly related to a students gender. However, the number of places where a credit card is accepted is significantly more important to female students than to male students. Table 2 shows that 74 and 66 percent of our male and female respondents respectively obtained their first credit by the time they started college. Noble, 2002 found that 74 percent of sampled male and 66 percent of female respondents had their first credit by the time they started college. Sallie Mae reported that 39 percent of their sampled students in 2008 had their first
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37% 50 46
30% 0 28
13% 12 10
20% 18 16
45% 42
23% 21
47% 40 41
46% 53 52
29% 24 22
35% 40 45
39% 36 41
The 2008 Sallie Mae survey shows that 92 percent of their respondents used credit cards to pay for various educational expenses followed by food, clothing, cosmetics, auto repair, and non-commuting expenses. Sallie Mae also reported that in 2008, students charged an average of $2,200 in educational expenses to cards, up 134 percent from four years earlier. Williams, Waterwall and Giardelli, 2008 found that the majority of their sampled students at a university in the southern United States used credit cards in emergencies followed by gasoline purchases and grocery shopping. Noble, 2002 in her survey of students at the University of Mississippi found that 53% of them used credit cards to pay for school related purchases, 59% for clothing, 65% for food, 64% for entertainment, and 73% to pay for car expenses such as gas and repairs. The 1998 TERI study indicated that one- third of students with card balance of over $1,000 used the cards to pay for tuition and fees while only 19% used them to pay for such expenses. Class standing, like gender, did not significantly predict the types of purchases made with credit cards. Hayhoe (et al), 2000 study found that female students used their credit cards
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19% 16
24% 31
19% 17 14
30% 33 37
28% 26 27
15% 13 11
8% 11 11
8% 7 6
56% 54
44% 52
5% 5
61% 58 47
54% 47 39
42% 37 31
28% 31 33
3% 3 7
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59% 63 72
27% 26 19
10% 8 7
3% 3 2
The 2008 Sallie Mae survey indicated that only 15 percent of freshmen had a zero balance on their credit cards down dramatically from 69 percent in 2004 and the average students living on the West Coast carried higher balances on their credit cards than did students in any other region in the country ($3,817 and a median of $2,080 compared to a nationwide average of $3,173 and a median of $1,645) with 16 percent of them having a balance of over $7000 compared to 12 percent nationwide. This might be attributed to generally higher living expenses on the West Coast. The average students credit card of $3,173 in 2008 as reported by Sallie Mae represent an increase of 46 percent compared to 2004 of $2,169 and 69 percent compared to 1998 of $1,879. Our sample had 24 percent of responding students with auto loans and 11 percent with home mortgages compared to the Jump$tart sample which had 12.5 percent with auto loans and 2.7 percent with home mortgages. This might be explained by the fact that 90 percent of our male and 84 percent of female responding students were either junior or senior students compared to about 49 percent in the Jump$tart study. Junior and senior students tend to be older with higher incomes, making it easier for them to qualify for auto and home ownership- related loans than their younger counterparts could qualify to get. Table 6 also shows that card holders with household income of less than $40,000 constitute the highest percent in all card- balance levels, indicating they depend on credit cards more than do households with higher levels of income.
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56% 46
12% 14
44% 51 57
13% 17 17
13% 13 12
30% 19 14
TERI (1998) indicated that most students managed credit wisely with 59% of them paying off their credit card monthly. Also, the study showed that 82% of students with credit cards had balances of $1,000 or less and many of them had and used cards in emergencies and to build credit history. Our study shows that 13.8 percent of our responding students with credit card balances of more than $1000 seldom paid off their balances or pay only the minimum required payment each month. Also, our sample showed that 4.8 percent of respondents with balances of more than $1000 are late paying their credit card bills at least once a year. Barron and Staten (2004) in their study of a pooled sample of over 300,000 credit- card accounts randomly selected from the portfolios of five general-purpose credit card issuers in the U.S. over a twelve-month period during 2000-2001 found that the average balance of a student credit- card account ($552) was about one- third the size of the average balance of a non- student young adult under age 25 and one-fourth the size of the average balance for adults 25 and older. Among their other findings were that students were substantially less likely to use the credit cards for cash advances and that 12.1% of students accounts were 30 days past due compared to 11.6% for other young adults and 8.1% for older adults. However, the 3.1% percent of student accounts that were 90 days past due were triple that of older adults and 29% higher than that of non-student young adults. Also, they found that a student account was less likely to incur finance charges in a given month but more likely to incur late or over-credit-limit fees. They concluded that although recently opened student accounts were more likely to be delinquent and have a higher likelihood of charge-off compared with other groups, the dollar amounts at risk on delinquent accounts and the actual losses on charged-off accounts were substantially lower. Further, within two years of opening the account, the delinquency and charge-off experience for student accounts became quite similar to non-student accounts of young adults. Norvilitis, Szablicki, and Wilson (2003) in their study of sampled students attending the State University of New YorkCollege at Buffalo found that over 75% of participating students had at least one credit card and a mean credit card balance of $1,518 and debt- to- income ratio of 24%. However, they believed that credit- card debt was temporary and controllable because it should be paid off after they finished their studies and started working. Also, they found that students who obtained their cards from on-campus sources were in greater relative debt than were students who got their cards from other places and they believe that colleges supported these companies. Students who obtained cards from such issuers were more likely to believe that these issuers were more reputable than others. More than half of their sampled students requested information about how they could reduce their debt burden. The 1998 Public Interest Research Group (1998) found that
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44% 48 64
21% 10 14
35% 42 21
TABLE 9: Level of Worry About Credit Card Debt Never Gender Male Female Household Income Less Than $40,000 $40,000 to $80,000 Over $80,000 Credit Cards Balance Under $1,000 $1,000 - $5,000 $5,000 - $10,000 Over $10,000 31% 29 Little 33% 25 Sometimes 18% 20 Often 13% 18 All the Time 5% 8
24% 30 36
26% 33 31
21% 16 18
19% 14 12
10% 6 3
36% 15 10 41
32% 27 24 6
16% 26 27 18
12% 24 23 18
4% 8 16 18
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SUMMARY
The paper presented the findings from a survey of over 600 mostly business students attending California State University, Fresno during the spring 2009 semester. The findings with few exceptions are in line with other research studies and in line with the notion that college students are no different than the general public in terms of their use of credit cards. The behavior of students is no less rational than that of the general public. According to the 2008 Student Monitor annual financial services study, 65 percent of the students with cards pay their bills in full every month which is higher than the general adult population. Furthermore, the 35 percent that do not pay their balances in full every month, the average balance is $452. This is down 19 percent from 2007 and is about one-third the size of the average balance for active non-student young adult accounts and one-fourth the size of active accounts for older adults. This may negate the need for special treatment by regulators. Finally, this survey found five statistically significant results related to gender. Weak economic conditions and record level of default rates forced many credit card issuers to stop aggressively targeting young adults, including college students, and therefore, reducing the need for restraints imposed by government laws. Furthermore, many college campuses imposed their own restrictions on credit card issuers setting up shop to market their services before CARD was enacted. Teaching college students smart money management techniques, including the responsible use of credit cards, should be a joint effort of parents, the educational system, and the credit card industry. Popular media technologies, such as, laptops, cell phones, ipads, webcasts, etc., should be employed to achieve such a goal. Reasonable access to college campuses is important to various firms offering students job opportunities and their services, and that should include credit card issuers. Finally, the eventual goal should be preventing careless or vulnerable students from increasing credit card debt and at the same time helping responsible students build up good credit card practices and other financial management skills.
REFERENCES
Armstrong, C. J., & Craven, M. J. (1993). Credit card use and payment practices among college students. Proceedings of the 6th Annual Conference of the Association for Financial Counseling and Planning Education, pp. 148-159. Barron. J., & Staten, M. (2004). Usage of credit cards received through college student- marketing programs. NASFAA Journal of Student Aid 34 (3), 7-26. Braunberger, K., Lucas.L. & Roach, D. (2004). The effectiveness of credit-card regulation for vulnerable consumers. Journal of Services Marketing.18 (5), 358-370. Demos. Org. (2008). The economic state of young America. Federal Reserve Bank of Boston. (2010). The survey of consumer payment choice. FinAid. Org (2010). The Smart student guide to financial aid. FINRA Investor Education Foundation. (2009). Financial capability in the United States. Author. Hayhoe, C., Leach, L., & Turner, P., Bruin, M., & Lawrence, F. (2000). Differences in spending habits and credit card use of college students. Journal of Consumer Affairs (34), 113-134. Jones, J. (2005). College students knowledge and use of credit. Financial Counseling and Planning. 16 (2), 9-16. Joo, S., Grable, J., & Bagwell, D. (2003). Credit card attitudes and behaviors of college students. College Student Journal.37 (3), 405-420. Lawrence, F., Burczyk-Brown, J, Chistofferson, R, Fair, S., Moser, B., & Tucker, Jeanette A. (2006). Louisiana Agriculture. Winter issue. 6-8. Lee, J., & Hogarth, J. (1999). The price of money: Consumers understanding of APRs and contract interest rates. The Journal of Public Policy & Marketing. 18 (1), 66-67. Lyons, A. (2004). A profile of financially at-risk college students. The Journal of Consumer Affairs. 38 (1), 56-80. Lyons, A. (2007). Credit practices and financial education needs of Midwest college students. Networks Financial Institute, Indiana State University, Working Paper-23. Mandel, L. (2008). Results of the 2008 National Jump$tart Coalition Survey of High School Seniors and College Students. Jump$tart Coalition for Personal Financial Literacy. Washington, D.C. Manning, R. (2003). The importance of financial literacy among college students. Testimony given before the U.S. Senate Committee on Banking, Housing, and Urban affairs, September 5, 2002. U.S. Government Printing Office, 14-18 & 41-53.
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