Credit Marred?

Students discover how their purchases and payments affect credit scores and futures

Joe applied for his first credit card while a freshman at St. Thomas. “I thought of it as a safety net if I ever got into trouble on the road,” he said.

The trouble he got into wasn’t on the road; it was in his wallet. At first he used the card to buy little things. “Then there was this one instance when I wanted to spoil myself and I figured I had the luxury to do so,” Joe (not his real name) said. “I went online and bought $700 worth of camping equipment with my credit card. I thought I would have no problem paying off the debt in a month or two. Then everything went wrong. Everything from my car breaking down to some massive doctor bills put me in a very tight financial situation. Not only that but I wasn’t making much money and so I was having trouble just making rent, let alone food and other bills.” After charging his rent many times that year, he had accumulated a balance of nearly $5,000. By the time he walked through commencement exercises in 2004, he was about $7,000 in debt. Now his debt is twice that.

“When you resign yourself to the idea of having debt, you tell yourself, ‘What’s the difference between a little debt and a lot of debt?’ ” Joe said. “That’s when the spending occurs.”

Along with the students who are in debt (and of course, their parents), many other people are concerned about credit card debt, including the institutions that issue the cards.

Nellie Mae, a student-loan provider, has been tracking since 1998 levels of credit card debt among students. Its 2004 report stated that Midwestern undergraduates had an average credit card debt of $2,498 – more than any other U.S. region. The Midwest also had more high-level credit card balances of $3,000 or more (20 percent); students with the highest average number of cards (4.76) and the highest percentage (50 percent) of those with four or more cards.

Credit score – it’s not just a number; it’s your future
Joe started out like many college students, just wanting to build credit. Most students, however, don’t realize that if they make a late payment, pay only the minimum due or own more than one credit card, it affects their credit score.

A credit score is a number between 300 and 850 and it packs a powerful punch. Fair Isaac Corp. develops the score for credit bureaus. A lender – the person between the borrower and a new car or house – will look at a credit score to see how likely someone is to repay his or her debts and to determine how much interest to charge. Landlords sometimes examine credit scores to see if someone will be a good renter. Prospective employers also may use this number to determine how responsible an employee might be. Insurance companies can view scores to determine rates.

St. Thomas Vice President for Student Affairs Jane Canney is concerned about the effect of debt on students. “National research says that there’s a link between credit card debt and a decline in academic performance and an increase in depression,” she said. “Students want to fit in. They feel pressured to have top-of-the-line accessories and electronics. It mimics what’s going on at the adult level and in the media; it’s an elevated expectation of lifestyle.”

She and several others at St. Thomas have been working to make students aware of the importance of excessive debt. “We want to help our students understand that credit card debt follows them though life,” Canney said.

An awareness campaign titled What’s My Score? will debut on campus this month. It aims to educate those new to credit, such as college students. It has proven successful at Hamline University, Macalester College, Concordia University in St. Paul, St. Cloud State University and Minnesota State University, Mankato. After 10-week campaigns, overall awareness of a credit score rose from 56 to 84 percent. Awareness of how credit scores can determine future employment opportunities and housing also increased.

Consultant Kathy Dougherty, the What’s My Score? coordinator, said the project doesn’t tell students not to use credit cards, but shows them how to use them wisely and how to manage their account.

What’s My Score? is part of a larger program, the Credit Card Project, formed in 2001 by the St. Paul Foundation to help consumers manage credit successfully.

Kim Gartner, director of the Credit Card Project, has co-written “What’s Your Score? Educating College Students About Credit Card Debt,” with St. Thomas School of Law Associate Professor Elizabeth Schiltz. It soon will be published by the St. Louis University Public Law Review.

“Most consumers use debt wisely and most (credit) card issuers sell it responsibly, (but) a significant number of people – measured by bankruptcies, credit card delinquencies and people in financial counseling – have serious trouble managing credit card debt,” according to Schiltz and Gartner. Schiltz and two others in the St. Thomas community serve on the Credit Card Project’s steering committee: Dr. Ken Goodpaster, Koch Endowed Chair in Business Ethics, and Ron James, president of the Center for Ethical Business Cultures.

“The issues surrounding credit card debt are very contentious and it is easy to take an extreme position on either side, blaming either the industry or the consumer for all that is wrong in the credit card debt arena,” Schiltz and Gartner noted. For that reason, the Credit Card Project involves all stakeholders: credit card issuers, credit bureaus, credit counselors, educators, ethicists, credit regulators, students and community activists.

Research conducted through the St. Paul Foundation showed that students think that a couple thousand dollars in debt is not such a big deal when compared to their student loans, which may be in the tens of thousands of dollars. The difference is the interest charged.

Credit card interest rates can vary from 12 to 22 percent. Some lenders offer low or free teaser rates for a limited time, after which the interest rates rise dramatically.

St. Thomas students had a say in how to best communicate the importance of a credit score to their peers this fall. Members of the Public Relations Student Society of America shaped the message for St. Thomas, along with Dougherty’s guidance.

St. Thomas senior Natalie Wicker interned last summer coordinating the What’s My Score? project. In addition to learning the ropes of PR, she learned about credit scores. “I wasn’t aware that having more than one credit card can hurt one’s credit score,” Wicker said. “I didn’t know that employers can look up your credit score and that a poor one can go against furthering possible career opportunities. Also, the reality that everyone is on the same playing field when it comes to credit scores is not often considered. The ‘I’m special’ or ‘this doesn’t apply to me’ mentality is irrelevant.”

You can bank on it
College students have three things that credit card issuers previously avoided: students are young and inexperienced with debt; they lack a significant, steady source of income to repay debt; and they may have other debt, such as student loans. In 1978, American Express issued the first “student” credit card. The attitudes about college students had changed. Students now are considered a long-term investment. Establishing an early relationship with students may bring them back to the bank for car loans, mortgages or other loans, according to Schiltz and Gartner.

In the 1990s, student credit cards became an accepted part of college life. Students enjoyed the ease of using credit.

“I’m a big fan of using credit cards for everything,” said Mike Haney ’98, “because it’s just more convenient than cash, easier to keep records of and easier to recover than cash if stolen, but it’s also easier to overspend, especially with Internet shopping. I buy almost everything online.”

Haney admits his credit card debt was about $3,000 when he graduated from St. Thomas. After graduate school and two years of living in New York City, he said his debt is about $6,000. Haney transfers the balance from one credit card to a new 0 percent card every year or so. He also pays more than the minimum each month.

“I buy a lot of things online like books and CDs with my credit cards,” said Ingrid Johnsen, who graduated last May and said she receives credit card offers daily in the mail. “I have about $1,500 in debt and own four credit cards, but my credit score is very high. My dad bought me Suze Orman’s book, The Money Book for the Young, Fabulous and Broke, and it really simplifies how to manage your credit.”

Many students use credit cards to purchase necessities, such as school supplies, textbooks and food. St. Thomas no longer allows credit card lenders to solicit on campus, and in 2003 discontinued acceptance of tuition payments via credit card.

Some card owners pay just the minimum amount due. “Students think that paying the minimum is the right thing to do,” said Dr. Susan Heckler, UST’s Distinguished Endowed Chair in Marketing, a specialist in consumer behavior. “If you just pay the minimum, that won’t get you out of debt. The debt keeps compounding.”

For example, if a student makes minimum payments on a $2,000 credit card balance, it will take him or her 30 years to pay it off, with an additional $5,000 for interest and fees.

From a lender’s perspective, debt is also risky business. Kevin Rhein, executive vice president of card services at Wells Fargo, serves on the Credit Card Project steering committee. “Some of those individuals could end up bankrupt, which is a significant expense to our business. Wells Fargo believes increased education and awareness, particularly with consumers new to credit, can improve both the cardholder and issuer experiences and result in a win-win outcome for all parties.”

“There’s responsibility on both sides – the lender and the user of credit cards,” said Goodpaster, chair of the Credit Card Project steering committee. “It raises the question, should bankers take a more protective role of their customers who are less informed, less experienced?” Goodpaster and research      associate T. Dean Maines created a case study that highlights the ethical dilemmas a real-life credit issuer faced in marketing credit cards to college students. The case study first was taught in 2002 at a credit executives’ event and has been used in the capstone course for the St. Thomas MBA program and at a local high school.

Build a good credit history
Some students enter college using a debit card they acquired in high school. It looks like a credit card and can be used as one; however, when a student uses it, the money instantly comes out of his or her checking or savings account.

Parents also can apply for a joint credit card with their student so they can monitor the use and payments each month.

Some parents tell their children to start building a credit history while in college. “That’s good advice,” said Rhein from Wells Fargo. “For people without a credit history, a lender doesn’t know how that individual will perform on paying the debt. When that individual wants a car loan or a mortgage, they might receive higher rates. Credit cards allow payment flexibility for consumers; it’s just a matter of not getting in over their heads.”

Opposite page: Credit scoring information used in the illustration is provided by Fair Isaac Corp. The FICO scores cited in this example are simplified and hypothetical. Actual scores may differ.