Tuesday, October 03, 2006

USATODAY.com - Easy credit can mean long-term hardship for college students

I am torn on this one. On one hand it is inarguable that many people (including no doubt a higher percentage of college students) do get into financial difficulty stemming from excessive use of credit cards. However, the ban on marketing of the credit cards on campus does seem a tad much. Credit cards do have their upsides as well: they help build credit and lower transaction costs.

On the other hand, many 18 year olds are not ready for credit cards and do succumb to overspending.
From USATODAY.com :
Easy credit can mean long-term hardship for college students: "College students tend to have less financial experience than older adults, making them more susceptible to these pitches....Nearly a dozen states, including New York and California, have made it harder for card companies to market on public campuses. And a growing number of colleges, on their own, have begun to impose restrictions."
Of course the credit card companies do not want to lose this market.

So what to do? If you are a college student who is mature enough to use (and not misuse) a credit card, I would recommend highly getting one to build credit and for ease of use. However, get one with no fee and pay off the bill completely every month. If you find this progressively more difficult to do, stop using it until it is paid off.


Anonymous said...

"Old enough to Kill, but not for Charging ..."

Let me get this straight: 18 year olds are "not ready" for credit cards, so 12 states banned them from college campuses. These same 18 year olds, who are too immature to control their credit card bills, are fully capable of fighting wars halfway around the world and killing and dying? Did New York and California ban elistment for 18 year olds ... because it seems to me that credit cards are a little less dangerous than ... oh ... let's say a roadside bomb.

Also, good luck to the financial institution that gives credit to immature students. That won't last long.

How in the world is the FinanceProfessor "torn" by this one?

FinanceProfessor said...

I agree in principle that if 18 year olds are adults, then they are ready for credit cards.

The reason I am torn is that I am not sure if 18 year olds are adults. Age is a poor proxy for maturity.

I have seen too many make very bad decisions that they are then stuck with (and of course this does open the question of whether military commitments should be allowed at 18 as well).

Of course, you are right that giving credit to immature students is not normally considered a recipe for financial success, but with late fees, annual fees, and high interest rates, it does appear that the companies have protected themselves quite well. What I fear (and am hence torn on), is that this lending is little different than some forms of predatory lending.

Some 18 year olds are definitely mature enough for both credit cards and other commitments, however there are some who are not. If the credit card companies (or the military) could somehow differentiate and only give cards (allow to enlist) the mature 18 year olds, then I would cease being torn. :)

Anonymous said...

I wrote the previous entry, and I'm a risk manager for a major credit card company. In other words, my job is to differentiate between risks - defined as the probability of "charging off" or not paying your credit card bill. Risk models - primarily logistic regressions - are used to differentiate risks and things like GPA, major, school, etc. are entered into those models which work quite well. For college students, lines of credit are usually very low before credit is proven, and those who are denied credit can get a secured line at some banks - usually backed by a certificate of deposit - to build their credit profile so they can do things like buy a house when they graduate.

"Predatory" lending is a ridiculous term which demands a definition. Risky people as determined by past experience and overseen by the ECOA - Equal Credit Opportunity Act - have a right to credit and financial institutions have to charge them higher interest rates and late fees or they would be unable to offer any credit at all - destroying any possibilities of securing automobiles or homes or things that rich professors take for granted.

The profits available on college campuses are marginal at best which is why few of the major credit card players care about those markets. I suspect that most that due enter the college market have over-estimated their lifetime cardmember values, and are making a mistake (but difficult to prove). If they can develop brand loyalty with these kids, they will make money. However, they will likely lose money in the near term because loaning money to 18 year olds is a recipe for disaster.

I am also an ex-Army sergeant who knows first hand that the US Army does a damn good job of differentiating between college aged kids. The poor, immature kid goes in the militiary, while the rich, well-educated kid wouldn't dream of serving a day. You don't see Bush's kids, Congressmen's kids, or FinanceProfessor's kids fighting. If the militiary only took the mature kids, there would be no militiary. To make matters worse, Bush's disaster has lowered the standards for enlistment dramatically in the last five years ... and US Today, state governments, and FinanceProfessor are worried about credit card solicitation on college campuses?

FinanceProfessor said...

Whoa...First I was not in favor of blocking credit card companies from signing up 18 year olds. I said I was torn.

"Torn" as in "I can understand and appreciate each side of the argument."

I do stand by my comment that age is a poor proxy for maturity. I am sure, and you stated the same, that companies use better metrics than just age to differentiate. So good job. :)

The rest of your comments barely merit a response, but against my better judgement (and I did wait for over a day) I will repond.

First the issue with predatory lending.

I am really unsure how you have taken my comment as suggesting that lending to the poor is predatory lending. NOTHING could be further from the truth! I am in favor of expanding credit to more, not fewer, adults.

Indeed, my wife's job is to work with parents who have no HS diploma so on a daily basis I hear and see the problems of lack of credit and money can cause. Of course, I also appreciate that lenders must account for a high level of non-payments. Anything else would be foolish.

However, in I am also seen that there are some unfair and--for lack of a better word--"predatory" lenders who make loans.

As for a definition of predatory, I lending, I will leave that to the Edward Gramlich (former Fed Governor). In this 2003 speach he laid out the difference between Sub-prime lending and predatory lending. (And yes he was speaking of mortgages, the same can be said of pretty much any type of loan)

And finally, and this one had me laughing, your comment on the military were so far off-base as to be hilarious.

First, Thank you for your military service.

No, I have not served in the military. So you have me on that one. But my dad did, my brother did, and my uncle was in Air Force his entire working life. So in one way or another you might want to re-evaluate your statements.

I TOTALLY disagree (as in 100% disagree) with the suggestion that if the military had to rely on mature enlistments there would be no military.

Huh? I reread that about 5 times, but that is what you wrote. This seemingly contradicts your position, so maybe it is a typo??(Indeed, I almost deleted your comment at that suggestion. )

If the military does screen as well as I hope they do, then our enlistments should be mature people who may or may not be 18 year olds. Not 18 year olds who may or may not be mature.

I think somehow you have me read wrong. I hope you have come to see that I am really not against you, your company, or the military. Indeed quite the contrary.

Your comments on the other hand ;)

Sorry I couldn't resist that last one :)


Oh and by the way, I do not have any children but if I did and they were mature, I would hope they would give the military serious(mature) consideration.

Anonymous said...

The sub-prime market – usually defined as lending to people below a certain FICO band - is not very profitable. The college market is not very profitable. Gramlich is correct in highlighting the increases in sub-prime lending over the last ten years, recognizing the increased sophistication in risk modeling, and “welcoming” the increases in home-ownership and other benefits associated with access to credit for poorer/younger people. However, he didn’t define predatory lending very well unless he meant fraudulent lending. I don’t believe fraud is an issue for any of the major credit card players, and it looks like Gramlich’s distinction between “sub-prime” and “predatory” revolves mainly around issues of fraud. The term “predatory lending” is still not clearly defined, but certainly loaded with misleading connotations and political overtones. Academics and those who want to be clear in their writings should likely not use the term.

Other than MBNA – now Bank of America – the major banks have not pursued the college markets very aggressively simply because it hasn’t proven to be profitable contrary to what is implied in the USA Today article.

Credit cards are probably a pretty good tool to offer people an opportunity for first-time borrowing because one can give lines of credit as low as $500 or $1,000. These size lines don’t saddle people for life as is suggested by the article. I think the college students who do get into financial trouble do so through retail credit cards which usually don’t have the same underwriting or regulatory standards that major banks have – although this is changing as well. The real problem for college students is the dramatic increase in tuitions that have occurred over the last 20 years or more in the face of relatively flat inflation figures.

Why has tuition increased so dramatically? My guess, and I haven’t read a lot about it from the academic world, is that the government sponsored student loans have a lot to do with it … if not everything. I remember the WSJ had a few articles about how those loans work and how bad they are for students and taxpayers, but great for banks and universities. The agreement between the banks, universities, and the government is the real predator that college students and taxpayers should know about. I haven't seen much written about it from the academic world. Are academics afraid to kill the golden goose?

It seems highly contradictory for USA Today to sensationalize lending to comparatively rich, well-educated college kids when the 18 year olds who likely need USA Today’s support are the ones being sent to war. Most soldiers are not Pat Tillman:



"Meanwhile, to meet enlistment targets, the Army has raised the maximum age of recruits to 41, lowered their required aptitude scores, and—in another recent gulp—relaxed moral and disciplinary standards. The Army has always waived these standards to let in a small number of applicants. But since the Iraq war, this number has risen substantially. In 2001, just 10.07 percent of Army recruits were given moral waivers—i.e., were allowed into the Army, even though they had committed misdemeanors or had once-prohibited problems with drugs and alcohol, records of serious misconduct, or disqualifying medical conditions. By 2004, this number had risen to 11.98 percent. But in 2005, it soared to 15.02 percent. And as of April 2006, according to a fact sheet obtained from an Army officer, the number has leapt to 15.49 percent."

I 100% agree that our recruits should be "mature people who may or may not be 18 years old" and I believe that your uncle's Air Force was a lot like that ... maybe even today's Air Force which is dramatically safer than the Army or Marines is a lot like that. The problem is that there are not enough mature adults who are willing to serve in the Army or Marines for this war at horrible wages and with horrifying working conditions. The militiary is increasinlgy forced to take whomever they can get which does not translate into high levels of maturity by any stretch.

"I TOTALLY disagree (as in 100% disagree) with the suggestion that if the military had to rely on mature enlistments there would be no military."

You can't lose 15% of your troops and mantain the same militiary. That's all I'm saying.

(Don't mean to come across so aggressively, but I don't have the time to write better)

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