A lesson on credit cards

The Baltimore Sun

Recently, a subcommittee of the House Committee on Financial Services held a hearing on the marketing tactics companies use to pitch credit cards to college students. It is not the first time the issue has come up.

This time around, though, the economy is reeling from the blow-up of risky mortgages made to homebuyers, known as the subprime-loan crisis. So lawmakers are looking carefully at banking practices that might lead consumers deeper into debt.

This year, for example, the Federal Reserve proposed reining in certain credit-card practices, including some rate increases on outstanding balances.

And in February, Rep. Carolyn B. Maloney, a New York Democrat and chairwoman of the subcommittee on financial institutions and consumer credit, introduced legislation that called for similar changes.

Now, Maloney is looking at how the credit-card industry markets to college students, who, some argue, are the least equipped to sidestep the practices under attack. Here are some of the issues:

Card balances

According to some reports, students need the help.

Demos, a nonpartisan public policy research organization, recently measured the financial health of young adults based on government data, including the Federal Reserve's 2004 Survey of Consumer Finances.

The group found that of 18- to 24-year-olds with credit cards, 66.3 percent carried a balance as of 2004. While that number had declined 3.8 percentage points from 1989, the average debt load was $2,305, up 11 percent in inflation-adjusted dollars.

The same trend was found for 25- to 34-year-olds. While the number of cardholders with balances had declined since 1989, the average debt was $4,358, up 47 percent.

Another viewpoint

The American Bankers Association sees it differently.

The industry group points to a study done by Student Monitor, a market research firm, which surveyed 1,200 students at four-year, full-time college programs across the country. According to the report, which is far smaller in scale than the Fed's but more recent, less than half of students carry a balance. And of students with credit-card debt, the average balance is $452, down 19 percent from $559 last year.

The report also showed that only 4 percent of students opened a credit card from a booth or bank representative on campus, or as a result of on-campus advertising. Nearly half of students (42 percent) applied for their credit card at the bank.

Avoiding the trap

With no clear consensus on just how bad off holders of student credit cards are, it is likely that change, if any, will come slowly.

Still, "regardless if any of these hearings actually lead to anything," said Curtis Arnold, founder of CardRatings.com, "I think the spotlight on the industry is a good thing."

Already, 14 states have passed laws that prohibit or restrict on-campus marketing by card issuers, according to the bankers group.

Certain banks, such as Wells Fargo, have rolled out education programs and produced results. Students who take Wells Fargo's credit-card tutorial, for example, are more likely to pay their bills on time and not carry a balance.

As you look at the options, ignore rewards cards. As a first-time cardholder, your first and only object is to learn how to make on-time payments every month and to charge only what you can afford.


Carolyn Bigda writes for Tribune Media Services.

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