Credit card consumers college students' knowledge and attitude

An executive summary for managers and executive readers can be found at the end of this article Credit card consumers: college students' knowledge and attitude Jacquelyn Warwick Phylis Mansfield Associate Professor of Marketing, School of Business, Andrews University, Berrien Springs, Michigan, USA Assistant Professor of Marketing, School of Business, Andrews University, Berrien Springs, Michigan, USA Keywords Credit cards, Consumer credit, Consumer behaviour, Debt, Students Abstract Given the proliferation of the credit card industry in today's US households, and the aggressive promotional tactics employed to get college students to sign on as customers, this exploratory study takes a look at the credit card activity of college students at one Midwestern campus. The majority of students surveyed did not report knowledge of their credit card interest rate, although approximately half did report knowing their credit balance and credit limit. Students appear to have a realistic attitude toward the use of credit cards. Introduction The credit card industry has developed into a major financial service used by the majority of US households across all income classes. What evolved from relatively humble beginnings following the Second World War, is now a major system that stimulates household and personal spending. For example, with the recent introduction of credit availability in the fast food industry, credit sales are now 50-100 percent larger than cash transactions (Ritzer, 1995). ``Baby Busters'' In many cases, consumers today live on or over the financial edge often spending everything they make, or more than they make, not even realizing their expenditures consistently exceed their income (Mapother, 1999). ``Baby Busters'' have been raised in a credit card society; they grew up with debt and use credit freely. To some, the money involved in credit card transactions is abstract and unreal (Roberts, 1998), to others, obtaining more credit is the equivalent to obtaining additional income (Mapother, 1999). This attitude toward credit can exacerbate credit card debt and personal bankruptcy. The FDIC reported that banks suffered $3.8 billion in losses on credit cards and consumer loans in 1996, a 36 percent increase over the same period in 1995 (Roberts, 1998). In 1997, 1.26 million people filed for personal bankruptcy (Paquin and Squire-Weiss, 1998), that number increased to 1.4 million in 1998. Paquin and Squire-Weiss (1998) suggest the change in the personal bankruptcy rate can be explained by the combination of four determinants (three with direct correlation to credit cards): the supply of consumer credit, consumers capacity to service their debt, the condition of the job market, and interest rates. Lessening of credit card debt can come about through an increase in awareness and understanding in the use of credit. However, awareness and understanding are different; companies listing credit card interest rates The current issue and full text archive of this journal is available at http://www.emerald-library.com JOURNAL OF CONSUMER MARKETING, VOL. 17 NO. 7 2000, pp. 617-626, # MCB UNIVERSITY PRESS, 0736-3761 617 increase awareness of the price of credit but this does not guarantee improvement in consumer understanding. Thus, mandatory disclosure of information itself (which leads to awareness) does not help consumers make effective credit decisions unless they understand the information provided. There is a general consensus that consumers' lack of understanding is a problem in credit markets (Lee and Hogarth, 1999). A lucrative market Nearly three in four US households receive at least one credit card offer every month with many offers being sent to college students. College students are seen as a lucrative market since they have higher than average lifetime earnings and are just beginning a major transition period which is a key time to change previous behaviors. Collegians are just beginning a cycle of ``firsts''; there is the first dorm room, first apartment, first job and, in conjunction with these, the first laundry, first long distance service, and first credit card (Speer, 1998). Given that for many students credit cards are a first, this paper will look at the attitudes college students have toward credit cards as well as how knowledgeable they are concerning the use of credit cards. Credit cards and students Promotion to college students A decade ago, only a handful of issuers pitched their cards to college students; now, 40 of the top 50, and about 65 of the top 100 card issuers are vying for their business (Ring, 1997). Why? This target market consists of an estimated 5.8 million students enrolled in four-year colleges and universities (which are populated with more women and older students than ever before), 4 million of whom study full-time. Part-time students in four-year and two-year schools and graduate students make up the balance of enrollees (Speer, 1998). One marketing firm estimates the spending power of all college students at more than $90 billion dollars with full-time, four-year enrollees spending an aggregate of $30 billion a year. It is estimated that of the $30 billion dollars, $23 billion is being used for essential purchases such as rent, food, gas, car insurance, tuition, and books and $7 billion in nonessential ``pizza'' money (Ring, 1997). Thus, card applications are becoming readily available on campus. Applications Applications can be found in a number of venues such as student mailboxes, tables in student union buildings, school events, ``take-one'' applications around campus, direct mail, Web sites, telephone solicitations, and campus bookstores. Credit card companies are also paying student groups to sign up classmates, sponsor campus events and arm cold callers with detailed data (often bought from the college) on each student. Companies also gather information from American Student List Company, Inc. (ASL), which works with colleges and high schools in student recruitment efforts. ASL has been compiling lists of student names, class year, fields of study, universities attended, as well as permanent and academic year addresses and phone numbers for 30 years (Credit Card Management, 1998). TeleServices in conjunction with ASL has more than 10 million names and generates about 500,000 credit card applications annually (Credit Card Management, 1998). This heightened marketing campaign has led to two-thirds of all college students carrying at least one credit card and one in five holding four or more (Rose, 1998). Credit activity of students Many students attain cards early within their freshman year and thereafter often remain loyal customers; many holding on to their first card for an average of 12 to15 years (Hultgren, 1998). Although card issuers state 618 JOURNAL OF CONSUMER MARKETING, VOL. 17 NO. 7 2000 delinquency and chargeoff rates are often no worse, and in some cases are better, than the general public (Ring, 1997) some are not convinced. Education officials worry about students accumulating both student loan and credit card debt. Student loan provider, Nellie Mae, state undergraduate credit card balances average $2,000 with 14 percent having balances of $3,000 to $7,000 dollars and 10 percent owing amounts exceeding $7,000 (Vickers, 1999). The Chicago Tribune quotes Indiana University administrator John Simpson as saying: We lose more students to credit card debt than academic failure (Commercial Law Bulletin, 1998). Yet in a recent survey it was found that four out of five college students had balances of $1,000 or less with more than half paying off their balances at the end of the month and those who paid by installment usually paying more than the required minimum (Merrick, 1998). Another survey, conducted by the US Public Interest Research Group found the average unpaid balance to be similar to the first with the average $986 (Commercial Law Bulletin, 1998) while a third survey indicates that 63 percent of four-year college students carry credit balances of at least $2,000 (Feldman et al., 1999). There is also anecdotal evidence suggesting that many under graduates are acquiring big balances in school, some even graduating with a five figure credit card debt. Although as noted, there is a wide array of differences in the information being reported, some colleges are not waiting for a definitive answer and are reining in card issuers. Also, lawmakers in some states, including New York and Massachusetts, are trying to ban card marketers from colleges altogether (Rose, 1998). Reasons for possessing a credit card College students argue they want and often need a credit card. A 1995 Roper College Track poll asked students why they had a credit card. The responses were: ``to establish a credit history'' ± 65 percent, ``to meet emergency needs'' ± 35 percent, and ``to become more financially responsible'' ± 18 percent (Newton, 1998). Although not opposed to their reasons for possessing a credit card, academics (as well as consumer advocates) feel an ethical obligation to serve the students' interests by determining the best way to educate them on what it means to have a revolving line of credit and how to manage credit responsibly (Hultgren, 1998). Although the obligation is noted, relatively few college students study personal finance, making primary and secondary schools the only places where the vast majority of young Americans can acquire financial survival skills (Mandell, 1999). Students' knowledge of credit cards A 1999 Youth and Money Survey found that most 16-22 year old US high school and college students do not know much about personal finance. Many are not confident about their knowledge of basic financial matters with only 15 percent stating they understand money very well, and only 18 percent agreeing that they do a good job of managing their money (Merrick, 1999). With an estimated 85 percent of college students having a credit card in their name (Ring, 1997) some credit card issuers are beginning to recognize that college students need instruction in how to be good credit card customers. Visa has run a media campaign aimed at teaching students how to use credit wisely (Speer, 1998). Visa is also sending out kits to freshman orientation leaders at 4,000 colleges, along with advice on how students should select credit lines. They are also planning to stage mock game shows on 20 college campuses to quiz students about their financial 619 Financial literacy JOURNAL OF CONSUMER MARKETING, VOL. 17 NO. 7 2000 savvy. American Express and MasterCard are also showing educational interest by having interactive Web-sites that allow students to play with financial charts and budget expenses (Commercial Law Bulletin, 1997). For those that receive or make use of the material and sites available to them, this may be their first steps toward financial literacy. The study Research questions Given the pressure the credit card industry puts on college students today to attain a credit card, evidenced by the aggressive promotion tactics employed on college campuses, this paper will address the following primary questions: (1) How are students attaining their credit cards? (2) Are students knowledgeable about credit? (3) What are the students' attitudes towards credit cards? Additionally, the study will explore the question of whether or not there are differences between demographic groups with regard to their attitudes toward credit. Sample frame Methodology The sample frame for this study was both graduate and undergraduate students at a small, private university in the Midwest, whose population of 3,100 is predominantly on-campus residents (95 percent). Since approximately 80 percent of the university's population visits the cafeteria on any given day, the students were approached by a researcher and asked to take part in the study. A total of 381 usable surveys were obtained, representing approximately 12.3 percent of the total university's student population. Simple t-tests showed there was no significant difference between the sample characteristics and the total university population. A breakdown of the sample by demographic characteristics is shown in Table I. An exploratory study was conducted using descriptive frequencies and percentages to describe the data. Additionally, cross-tabs were used to analyze differences between various demographic characteristics, reporting the chi-square statistic at the 0.05 level of significance. Demographic characteristic Gender Male Female Age 18-20 21-23 24-26 27 and over Class standing Freshman Sophomore Junior Senior Graduate Note: n = 381 n 171 207 173 144 34 25 94 75 90 75 38 Percent 44.9 54.3 45.4 37.8 8.9 6.6 24.7 19.7 23.6 19.7 10.0 Aggressive promotion tactics Table I. Descriptive profile of sample by demographics 620 JOURNAL OF CONSUMER MARKETING, VOL. 17 NO. 7 2000 Findings Promotion of credit cards With card applications available in numerous formats, this study first addressed how students attained an application. Of those students reporting ownership of a credit card, only 15 percent had attained them by requesting an application directly from the company. Another 37 percent received the credit card application through unsolicited mail. Students typically receive unsolicited mail through several venues: commercial mailing lists through memberships to music or book clubs, magazine subscriptions, or by completing sweepstakes entry cards. Another 33.6 percent of the students received the application for a credit card at the school itself, either at kiosks located at special school events, or commonly distributed in the ``bag'' for carrying purchases from the school bookstore. Job requirements Possession of credit cards As the data in Table II indicate, roughly two-thirds of the students responding possessed at least one credit card. Of those students who owned cards, the majority (22.8 percent) owned only one. However, 20 percent owned two credit cards, and almost 4 percent had over five cards. The majority of students in this sample are full-time undergraduates at a predominantly residential campus, who are likely to be employed in jobs paying the minimum-wage for part-time (under 20) hours. This leads to the question of whether credit card companies relax their standards for job requirements when marketing to college students. Students' knowledge of their credit card Of interest in this exploratory study was the degree of knowledge that college students had with regard to financial information concerning their credit card. Specifically, the question dealing with students' knowledge of the interest rate on their credit card, its credit limit, and its outstanding balance. Table III presents a summary of the percentages of interest paid on the student's credit card with the highest interest rate. Of the students, 71 percent had no idea what interest rate they were paying on this card, and the majority of those who did know were paying an interest rate of over 17 percent. Credit limit Although almost half reported that they did not know their credit limit or credit balance, students do appear to be more knowledgeable about the credit limit amount than the interest rate on their credit card. A total of 57 percent of the students said they knew what the credit limit amount was on their card (Table IV), and 52.5 percent of the students knew what the current balance was on their account (Table V), compared to 29 percent knowing its interest rate (Table III). Further studies may determine why students appear to be more aware of their card's credit limit and balance than they are of its interest rate. Number of cards None One card Two cards Three cards Four cards Five cards Over five cards Note: n = 378 n 127 87 77 49 16 7 15 Percent 33.5 22.8 20.2 12.9 4.2 1.8 3.9 Table II. Number of credit cards in possession JOURNAL OF CONSUMER MARKETING, VOL. 17 NO. 7 2000 621 Interest rate percent Do not know 10.0 11.0 12.0 13.0 14.0 15.0 16.0 17.0 18.0 19.0 20.0 and over Note: n = 381 n 271 4 2 6 4 6 7 4 13 20 15 29 Percent 71.1 1.1 0.5 1.6 1.0 1.6 1.8 1.0 3.4 5.2 3.9 7.6 Table III. Highest interest rate on credit cards Credit limit amount Do not know $500 $501 to $1,000 $1,001 to 1,500 $1,501 to 2,000 $2,001 to 2,500 over $2,500 Note: n = 381 n 164 41 77 22 17 6 54 Percent 43.0 10.8 20.2 5.8 4.5 1.6 14.2 Table IV. Credit limit on highest interest rate card Balance amounts Do not know $500 or less $501 to $1,000 $1,001 to 2,000 $2,001 to 3,000 $3,001 to 4,000 over $4,000 Note: *n = 381 n 181 109 56 18 6 4 7 Percent 47.5 28.6 14.7 4.7 1.6 1.0 1.9 Table V. Balance on highest interest rate card Attitude toward credit Students' attitude toward credit cards Students were asked to describe their feelings about credit cards in general by selecting from four statements, the one which most closely described their attitude toward credit. These four statements were: (1) They are the best thing man ever invented (1.4 percent). (2) They are good, if used correctly (68.6 percent). (3) They are not the best way to manage money (21.2 percent). (4) They are the worst thing man ever invented (8.2 percent). Additionally, the attitude item was compared to various demographic characteristics to see if there were any differences between age, gender, those with numerous credit cards, those with high balances, and those with high interest rates, with regard to their attitude toward credit. No significant 622 JOURNAL OF CONSUMER MARKETING, VOL. 17 NO. 7 2000 differences were found with regard to these demographic characteristics and attitude. Table VI lists the frequencies in these demographic categories across the four responses on attitude toward credit. Conclusion This study shows that the majority of college students who own credit cards do not actively seek them out, but are aggressively pursued through the mail and on-campus by credit card issuers. Given that most students in our sample were residents on campus, and therefore likely to have jobs that pay close to minimum wage, this could raise concern over the social responsibility of both the credit card issuer and the university with regard to access to the student. Many schools have already banned the active pursuit of college students on-campus by credit card companies. Students' knowledge of credit With regard to students' knowledge of their credit card, the majority of students did not report knowing the interest rate they were paying. Although approximately half did report knowing their credit balance and the credit limit on their cards. It would be of interest in future studies to see if the students' knowledge of their credit card data is comparable to that of the general public. Students' attitudes toward credit cards appear to fall primarily in the ``good, if used correctly'' category (68.6 percent). This suggests that students appear to have a realistic attitude toward using credit, although not knowledgeable about the details on their credit card. In summary, the results of this study raise the question of whether or not universities in general and business schools specifically, should do a better job of preparing their students to be knowledgeable consumers in the marketplace. Benefit ratio Managerial implications and applications Given the billions of dollars in losses on credit cards and consumer loans suffered by banks, it is imperative that these institutions look at the cost/ benefit ratio of the college student as a target market. Banks are interested in this market due to the fact that the first credit card an individual possesses is likely to be held for an average of 12-15 years. However, in this study 43 percent of the students had more than one card, which may not provide as strong a card loyalty as anticipated. Additionally, in this study of full-time students who are likely to be employed only part-time at minimum-wage jobs, 20 percent owned two credit cards, and almost 23 percent had three or more cards. Of these, 26 percent had a credit limit of over $1,000. Thus, the fiscal responsibility of issuing banks should consider the number of credit cards possessed by a new student applicant, as well as setting appropriate credit limits. University administration also has a fiscal interest in the student as well as an educational responsibility for what the student is exposed to on campus. Given these responsibilities, many campuses have chosen to prohibit credit Attitude response (1) (2) (3) (4) Gender M F 18-20 4 115 34 14 Age group 21-23 24-26 1 97 31 11 0 22 6 6 Over 26 0 14 7 1 Best thing ever invented 3 2 Good, if used correctly 112 138 Not the best way to manage money 36 41 Worst thing man ever invented 14 11 Table VI. Attitude toward credit by demographic characteristics JOURNAL OF CONSUMER MARKETING, VOL. 17 NO. 7 2000 623 card solicitation by issuing banks on campus. However, this may not be the ultimate solution since there are multiple sources where students may acquire credit card applications, as well as it does nothing to educate further the student on the basic principles of using credit. In this study, 71 percent of the students did not know the interest rate on their card, 43 percent their credit limit, and 48 percent their current balance amounts. Therefore, student education may be an alternative to prohibiting on-campus credit card solicitation. References Commercial Law Bulletin (1997), ``Doing something about the problem'', Vol. 12 No. 6, pp. 8-9. Commercial Law Bulletin (1998), ``Student credit card debt'', Vol. 13 No. 6, p. 7. Credit Card Management (1998), ``Wake up to the college market'', Vol. 11 No. 1, p. 14. Feldman, J., Johnson, P., Kuhn, D. and Murphy B. (1999), ``Back-to-school buying guide'', Money, Vol. 28 No. 9 pp. 165-8. Hultgren, A. (1998), ``Help students handle cards'', Credit Union Magazine, Vol. 64 No. 8, p. 10. Lee, J. and Hogarth, J. (1999), ``The price of money: consumers' understanding of APRs and contract interest rates'', Journal of Public Policy and Marketing, Vol. 18 No. 1, pp. 66-76. Mandell, L. (1999), ``Our vulnerable youth: the financial literacy of American 12th graders: a failure by any measurement'', Credit Union Magazine, Vol. 65 No.1, pp. 4A-6A. Mapother, B. (1999), ``The real cause of bankruptcy'', Credit Union Magazine, Vol. 65 No. 6, p. 78. Merrick, B. (1998), ``Most college students use credit cards responsibly'', Credit Union Magazine, Vol. 64 No. 8, p.18. Merrick, B. (1999), ``Teenagers' lack of financial knowledge'', Credit Union Magazine, Vol. 65 No. 7, p. 20. Newton, C. (1998), ``Today's college students: responsible, self-reliant, and realistic'', Credit World, Vol. 86 No. 4, pp. 16-17. Paquin, P. and Squire-Weiss, M. (1998), ``Personal bankruptcies: study finds four key determinants'', Journal of Retail Banking Services, Vol. 20 No. 1, pp. 49-55. Ring, T. (1997), ``Issuers face a visit to the dean's office'', Credit Card Management, Vol. 10 No. 7, pp. 34-9. Ritzer, G. (1995), Expressing America: A Critique of the Global Credit Card Society, Pine Forge Press, Thousand Oaks, CA. Roberts, J. (1998), ``Compulsive buying among college students: an investigation of its antecedents, consequences, and implications for public policy'', The Journal of Consumer Affairs, Vol. 32 No. 2, pp. 295-319. Rose, S. (1998), ``Prepping for college credit'', Money, Vol. 27 No. 9, pp. 156-7. Speer, T. (1998), ``College come-ons'', American Demographics, Vol. 20 No. 3, pp. 40-5. Vickers, M. (1999), ``A hard lesson on credit cards?'', Business Week, March 15, p. 107. & 624 JOURNAL OF CONSUMER MARKETING, VOL. 17 NO. 7 2000 This summary has been provided to allow managers and executives a rapid appreciation of the content of this article. Those with a particular interest in the topic covered may then read the article in toto to take advantage of the more comprehensive description of the research undertaken and its results to get the full benefit of the material present Executive summary and implications for managers and executives Students and debt ± minimising the risks I am sure that most people of my generation (and I am not yet 40) did not have a credit card when they were a student. The huge explosion in the use and availability of credit has come during the 1980s and 1990s. And, as Warwick and Mansfield describe, this increased use of credit cards has come with attendant problems ± excessive debts, rises in personal bankruptcy and increases in default and non-payment. For some observers the rise in personal debt ± especially in the USA ± is one of the more concerning social problems of our age. And we know who the culprits are ± we have seen their direct mail! Warwick and Mansfield report that the average American receives one credit card solicitation each month. We are sweet talked, badgered and cajoled into taking out credit, often at fairly prohibitive rates of interest. But do we care? Of course not ± until that is we get into difficulties repaying the money we've borrowed. Warwick and Mansfield focus on students as a key target audience for banks and other financial institutions. These organizations see students as tomorrow's high earners and know that getting them into the habit of using a credit card bodes well for future lending and therefore future profits. We have to assume that the credit issuing institutions have done their sums and can accept the risks associated with the relatively small number of students who use their cards irresponsibly. Most students are responsible about personal finance (I know it is hard to believe) The revealing finding from Warwick and Mansfield's research is that most students take a pretty responsible approach to debt. This is not to say that they eschew the opportunities presented by the credit card industry ± most students now have at least one card. But these students do not run up excessive debts ± two of the three studies into this issues reported on by Warwick and Mansfield show average debts of around $1,000. Given the likely earning power of the students soon after graduation such levels of debt are recoverable and acceptable to the financial institutions. The question becomes one of placing responsibility. We expect students to adopt an increasingly mature attitude and there is no reason why this should not be the case for financial matters. However, what Warwick and Mansfield find is that students are somewhat naõve about personal finance matters. È While one hopes that the students are able to grasp the principle of debt (these are the most intelligent individuals of their generation), there is something of a Micawberish attitude that tends to prevail ± it does not matter about the debt, we will sort it out when we get a job. The response of colleges and universities so far has been somewhat nannyish ± largely futile attempts to stop credit card issuers from getting their offer in front of students. Not only is this a somewhat patronising approach, but it also seems, from Warwick and Mansfield's findings at least, that such access controls do not work. The credit card companies are too keen on reaching students to be stopped by the righteous efforts of college authorities. JOURNAL OF CONSUMER MARKETING, VOL. 17 NO. 7 2000 625 Is education the solution to student financial ignorance? Warwick and Mansfield suggest that colleges should consider financial education programmes rather than continuing to act like King Canute holding back the tide of credit card offerings. The question is how best to deliver such programmes ± as an element within the course proper or else through some other method. Warwick and Mansfield point out that some of the big financial institutions have accepted the need to provide better personal finance guidance to students. Personal finance advice has always been available to students. However, the recipients of this advice have tended to be the financial basket cases ± students who have got into serious financial difficulties. These interventions may result in recovery for some of these students but they do little to reduce the total numbers of students experiencing credit repayment problems. It is right that colleges make financial advice as freely available to their students as possible. But it will always be difficult to ensure that those students take advantage of such a service ± it is hard enough to get students to come to lectures let alone a session on managing personal finance! The financial institutions can assist in this aspect by linking advice to the issuing of a credit facility. But, some would argue, these institutions have an interest in promoting moderate levels of financial irresponsibility! Are credit card companies really irresponsible in their approach to students? Many college authorities and other observers are sure that the principal villains in the student credit problem are the banks and credit card issuers. These organizations are issuing cards with credit levels far in excess of what the student can manage ± Warwick and Mansfield remind us that most students are working in minimum wage employment if they're employed at all. However, in the banks' defence (and like Ogden Nash I find it hard to defend banks) they can safely argue that they are responding to demand, that most students are pretty responsible and anyway it is the bank that is taking the risk of higher levels of default or non-payment. Plus of course the justification for high rates of interest is that credit card debt is a pretty high risk, unsecured loan facility. The growth in the use of credit by the wider society is not some cunning capitalist plot by the banks but a fundamental shift in the financial culture of western society. This shift is as much a reflection of increased wealth and income as it is of financial deregulations and rapacious bankers (we should not forget that usury is as old as money and the banks have always got a pretty bad press). Nevertheless, it is in the banks' interest to promote the sensible use of credit ± the steady credit user is a far better long-term bet for the bank than the boom and bust spendthrift. Colleges and other student authorities should seek to accommodate the banks by developing partnerships that deliver better financial information and education, more protection for students and better bets for long-term custom. (A precis of the article ``Credit card consumers: college students' knowledge  and attitude''. Supplied by Marketing Consultants for MCB University Press.) 626 JOURNAL OF CONSUMER MARKETING, VOL. 17 NO. 7 2000