Give Them Some Credit

Lisa Kienzle
September 01, 2001

When Sarah Smith came to Penn State as a freshman a few years ago, she got her first credit card. She soon had a bill to pay, so she took out another card to pay for the first using the cash advance feature. She kept opening more accounts to pay for other credit card bills until she was in debt $20,000—and forced to file for bankruptcy.

drawing of house made of credit cards

Two years later her sister Megan came to Penn State with one credit card—for emergency use only. She was determined to learn from Sarah, and vowed to never charge over $100. "I used to have panic attacks if my bill reached one hundred dollars. Yet the boundary kept getting pushed back," she explains. "My goal now is to graduate under one thousand dollars. Once students get into credit card debt, it's never-ending."

"Sarah" and "Megan" (their names have been changed) are not alone. The average college student carries a debt of $2,226, and in 1999 a record 100,000 Americans under 25 declared bankruptcy. Others take more drastic measures—some have even committed suicide because of credit card debt.

"The truth of the matter is, most college students come to school with rudimentary financial knowledge—perhaps they have had a checking account," says Todd Palmer, assistant professor of business law and management at Penn State Erie, the Behrend College. "They are put in a college environment and bombarded with credit card flyers, so that the average student gets several credit cards quickly."

Palmer, with Mary Beth Pinto, assistant professor of marketing, and Diane Parente, assistant professor of management, became concerned about the number of students they saw with credit card problems. They surveyed over 2,000 students at three universities and researched factors that could affect student debt, such as on-campus solicitation.

By allowing credit card companies to solicit on campus, universities can make a lot of money, they said. Reporters for "60 Minutes II" found that in exchange for exclusive marketing rights to students and alumni, Discover Card paid the University of Oklahoma $13 million and an additional four-tenths of a percent for each purchase students charge. In these cases, "The university makes a profit off people in debt," Palmer explains. Several schools have banned credit card companies from campus—meaning no flyers in books or on bulletin boards, and no tables in the student union. The Penn State researchers examined this policy, expecting to find that students at universities that banned solicitation had fewer cards and lower debts.

They were wrong. "Even when schools are denying cards on campus, the students are still getting them," says Pinto, explaining that companies access students by setting up tables near campus or through telemarketing and mail. However, Palmer adds though this limited research may not have supported their hypothesis, we still need to question whether it is professional or ethical to allow on-campus solicitation.

The student debt problem caught the eye of Congressional legislators; they introduced a bill in Congress in 1999 proposing that persons under 21 must have parents or guardians co-sign to get cards. The Penn State researchers tested this assumption—that students whose parents cosigned for a card would have lower debts. "We found that students whose parents help get cards, but don't help pay for them, have the lowest balances—our study supports the legislation," Parente concludes.

Not surprisingly, the credit card banks have opposed such laws. "The argument is that this is business. This is an untapped market, and they go after students as they go after any market," says Pinto. Banks claim that students aren't kids, citing that if a student is 18 and can vote or go to war, he or she should be old enough to manage a credit card.

The banks also argue that they offer low introductory credit limits to educate students financially. Yet Palmer points out that "the limits rise over the years, and if students have three credit cards with $2,000 limits, they can develop a $6,000 debt. If they make no money, that's a problem—banks need to look at income too."

But the banks aren't looking at income. A middle-aged unemployed American may not easily get a credit card. But a college student? "Kids do not have to show an income source—they do not even have to have a job. They can just say they are getting money from their parents," says Pinto.

The researchers questioned whether students with certain characteristics developed more credit problems than others. They surveyed students who were considered "materialistic" versus students who weren't, and found "they had the same amount of debt, but used cards differently," says Palmer. For instance, materialistic students used credit cards more frequently than students who were not considered materialistic.

These reports reveal that there are as many different credit card problems as there are students who have cards. The researchers recognize that a university may have a responsibility to protect students with problems, and because on-campus solicitation doesn't affect credit usage, policy makers need to consider other factors.

"What they need to do is come up with techniques and methods to train counselors to recognize people with different kinds of credit management issues," says Palmer.

Pinto and Parente agree that education is necessary, but points out that starting in college is too late. "What has created this market is society at large. Parents need to be directly involved in the learning process. Everything seems too easy in society today, and many spending habits have been ingrained in kids from an early age," says Pinto.

The answer may involve many factors: parents, students, and public policy. Says Palmer, "Like other social issues and problems, the solution to this will be just as complex as the problem itself."

Todd Palmer, Ph.D., is assistant professor of business law and management in the Penn State Erie School of Business,1 Turnbull Hall, Erie, PA 16563; 814-898-6107; Mary Beth Pinto, Ph.D., is assistant professor of marketing in the Penn State Erie School of Business; 898-6343; Diane Parente, Ph.D., is assistant professor of management in the Penn State Erie School of Business;898-6436;

Last Updated September 01, 2001