By Julie Strickland
By the time Reese Ong graduated from college in 2007, she was over $10,000 in credit card debt.
Ong, 27, got store cards with Macy’s and Victoria’s Secret just before her sophomore year of college. One cold night at a baseball game, she filled out two more credit card applications in exchange for blankets. She also had an MTVU student credit card, on which she paid the minimum every month.
“But, I kept on shopping,” Ong said. “I just kept telling myself that I’d pay off all my balances by the time I was a senior and graduated, because I’d get a job right away and make enough money to pay it all off. How naïve and idealistic I was!”
Seventy percent of undergrads have a credit card in his or her own name, according to a study published in the International Journal of Business and Social Science. About 36 percent have two or more.
This might suggest a culture in which young people are savvy managers of debt, building credit with distant goals such as purchasing a car or home in mind. But the exact opposite is often true. Of credit card holders aged 18-25, only 9.4 percent say they pay their balances off in full at the end of every month. 14.6 percent say they don’t even know the interest rate on their card. There are several reasons this happens, and the out-of-control credit card debt can have serious implications for the future.
College students become credit card owners for a number of reasons. For starters, the cards are easy to get. Banks and credit card companies aggressively court young people who are enrolled in college because, they say, students are valuable customers.
“Our objective in serving the student market is to build the foundation for a long-term banking relationship,” said Betty Riess, senior vice president of public relations for Bank of America. College graduates are likely to one day have higher incomes than their less-educated counterparts, so banks expect these relationships to pay off when young grads need more complex, costly services such as financing a home.
Despite having little to no income and zero credit history, getting approved for a credit card as a student isn’t difficult. Riess says that Bank of America looks at an individual’s ability to pay and will take summer and part-time jobs into account. But cardholders say the reality can be spottier, with young people sometimes having a card thrust upon them.
Amanda Moses, now a 23-year-old graduate student, was only 18 when Chase Bank offered her a credit card. At that point, she had been a customer with a checking account for three years.
“I went to Chase to open up a savings account and they offered me a credit card,” she said. “I remember being told not to use it, to just keep it in a drawer. So at first I left it alone.”
But Moses eventually succumbed to a temptation all too common among broke college kids. When she wanted to make a big purchase that she couldn’t afford, she turned to her shiny new plastic.
“I wanted tickets to ‘Equus,’” she said. “I was a big Dan Radcliffe fan and really wanted to see it, but my mom didn’t want to get me tickets because they were too expensive.”
$300 later, Moses had orchestra-level seats.
“I thought I was so cool,” she said, shaking her head.
Opening Pandora’s box led to subsequent credit card purchases, and she is quite literally still paying the consequences.
Owning a credit card does not, of course, have to mean death to one’s finances. But the problem is that many college students have never had access to a credit line before and don’t understand interest rates, fees, minimum payments and revolving balances.
Gina Lucente-Cole, a financial consultant with American Student Assistance, says that the error stems from a lack of understanding about how cards work and how to use them responsibly. Many 18-year-olds have had little financial education and don’t have enough money to make ends meet. They make the mistake of using it for what she calls “the wrong things,” such as weekend entertainment and clothing.
“It becomes essential,” she said. “They think, ‘I wouldn’t be able to do this if I didn’t have my credit card,’ and so they use it for extra spending when they don’t have that liquidity.”
Even among students who set out with the best intentions, a ticket to spend can prove tempting.
“At first I was a bit wary,” said Emma, 24, a graduate student who asked that her last name not be printed.
“They were for emergencies,” she said. “But when I realized I was unsupervised and nobody knew what I was doing, it suddenly became ‘oh it’s only $60, not a big deal.’” She quickly became desensitized to how much she was spending. And the higher her balance went, the more the interest rate climbed. Soon she realized that with every payment she was taking one step forward and two steps back.
Emma talks about how she fell into credit card debt, how she’s handling it now and her financial concerns for the future.
Credit card debt coupled with missed payments or high revolving balances can get in the way when young people want to move forward in their financial lives. The terms of big purchases often hang on one’s credit rating, which can plummet in the face of mismanaged debt.
Jeff Paice, a former sales representative with World Ford in Pensacola, FL says that an auto customer begins the purchasing process by filling out a credit application. The dealer sees the applicant’s credit score followed by a detailed report, which shows the type of debt he or she has and the debt-to-income ratio.
“Sometimes they have a decent credit score but the debt-to-income ratio is too high,” Paice explained. “This means they pay their bills on time but have too much debt racked up. Banks usually don’t like to lend money for a car if the debt-to-income ratio is over 55 percent.” The only way around the issue, he says, is a higher down payment or a co-signer.
Even the rental housing market can prove inaccessible to grads who are in credit card debt. Landlords often do credit checks before approving tenants and will reject applicants who don’t have a gleaming score. Getting the money to start a small business or private loans to supplement the cost of higher education can be off limits as well. Even employers have an interest in the financial standing of potential hires and are increasingly checking their credit rating. The trend is especially prevalent in the fields of banking and finance.
For indebted college grads seeking to turn their finances around, the road to recovery is difficult but not impossible. Credit counseling organizations work with students to educate them about their options, such as consolidating the payments of multiple cards into one lump sum or negotiating lower interest rates. Banks have a certain amount of flexibility to negotiate interest rates, fees and minimum payments. Some have provisions for customers under financial strain such as moving or being unemployed, and will suspend payments or interest for a set number of months.
But no matter what creative measures one takes to address debt, in the end it involves hunkering down and making payments until it goes away.
Reese Ong’s parents lent her the money to pay off her credit cards and she reimbursed them in full within four years. She says she has learned a lesson and is now far more careful about her spending.
“I’m financially stable and yet I am so scared to let go of the money in my checking account,” she said. “I still get that anxious butterflies-in-stomach feeling when I go to pay a bill online.”