Credit Cards on Campus—Should They Be Banned or Blessed?

Gordon McGinnis, Assistant Dean and Director of Student Activities at Mountain State University, had vehemently banned credit card solicitations on campus for the five years he had so far served the University as Student Activities Director. To him, it was a matter of acting in the best interests of Mountain State’s 30,000 full-time students, 95% of whom were between 17 and 22 years old. Over the years a number of credit card companies and banks had approached him offering deals to market their cards on campus, which would result in good money for the University. Typically, they would propose marketing the cards at kiosks located at special school events, inserting credit card applications in bags distributed for carrying purchases from the school bookstore, posting “take-one” applications around campus, and/or pitching them at sign-up tables during freshman orientation. However, Gordon had always stood his ground and turned them down.

Frequently, however, he found out through the grapevine that credit card hawkers were on campus unannounced and without permission in dormitories and high-traffic locations, trying to woo students with items like free T-shirts, Frisbees, music CDs, chances to win airline tickets, and even promises of an easy way to pay for spring break vacations as enticements to sign up. Several times student organizations had been directly approached by the marketers who asked them to sign up classmates for the cards in return for up to $3,000 a year. Even though the student leaders would tell Gordon that students could just sign up for a card to get the goodies and then tear it up, Gordon always held his ground.

Unfortunately, however, Gordon knew that he wasn’t the ultimate gatekeeper, since students also receive unsolicited offers from several venues. These include direct mail (names come from commercial mailing lists through memberships to music or book clubs or via magazine subscriptions, as well as by completing sweepstakes entry cards); Web sites; and telephone solicitations. He had read somewhere that the majority of students who own credit cards do not actively seek them out, but are aggressively pursued through such media.

Gordon had read in newspaper and magazine articles about the ubiquity of cards on campus. While the statistics varied from study to study, about two-thirds of all college students have one or more credit cards (20 per cent own five or more), with an average spending limit of $5,000. Generally the average student has a credit card debt ranging around $1,000, although more than half pay off their balance at the end of each month.

Gordon’s rationale for reducing the prevalence of the cards on his campus was simple—students were, in effect, throwing away their credit ratings by getting into debt in exchange for a few trinkets. He had heard stories from his colleagues at other colleges where students would cut back on classes or drop out to earn money to pay off debt. And, bad credit histories often hurt students seeking their first jobs, especially since many of them had both student loan and credit card debt. Gordon has even heard tales of students using their credit line to gamble online. He also knew from personal discussions with students that many are unprepared to manage their finances—some aren’t taught how to balance a checkbook or use credit.

In fact, Gordon was aware that credit cards even cause problems for many adults. To some grownups, the money involved in credit card transactions is abstract and unreal, and to others, obtaining more credit is the equivalent of getting additional income. Gordon knew that, similarly, many college students don’t understand that when they charge an item they are borrowing money—instead, they just view the card as extra money. Nonetheless, research has found that their behavior compares very favorably with the general population. They are more likely to pay off their credit cards immediately, with slightly over half paying off their balances each month, compared to no more than 40% of the general population. Delinquency rates among college students are no worse, and in some cases are better than for the general public.

Nevertheless, Gordon knew he was in good company in his thinking about how odious marketing credit cards to college students—lawmakers in several states had tried to ban card marketers from colleges altogether, and increasingly schools have been actively restricting or banning non-affinity credit card marketers from campus. Too, credit card companies have been blasted by consumer advocates who see campuses as the financial world’s version of a crack house, complete with professional dealers who hook students with easy doses of credit. Credit-hungry students are often a card issuer’s best customers, despite the fact that most don’t have a credit history or even a job. Students often become loyal to their first credit card throughout adulthood. In fact, once a bank secures a captive student audience, it can cross-promote other products such as first mortgages, car loans, and, in Gordon’s view, in a sinister twist, even debt-consolidation loans to help students repay credit-card debt.

Despite his successes to date in keeping the credit card hawkers at bay, Gordon was given a new challenge recently when he received a phone call from Elsie Lombardi, the University’s Financial Vice President and Treasurer.

“I was just made an offer I don’t think we can refuse,” began Elsie.” “Highland Bank Corporation’s Credit-Card Division wants us to enter into an exclusive affinity marketing credit card program with them for the next three years. They will pay us $5 million divvied out evenly over the next three years to allow them to be the only bank card issuer allowed to market on campus at sports events, in the Student Union Building, and in the University bookstore, plus through student and alumni mailing lists. The card will be adorned with Mountain State’s picture and logo, which will make cardholders more loyal—for users it’ll be like being part of a club. They will also give the university one-half a per cent of every transaction charge, which they estimate will amount to about $1.5 million annually. If you accept this deal, I am prepared to turn over to your Student Activities Division one-half of the revenues we make on these charges.” And, they’ll give us $6 for each new account that’s opened. What could be easier money?”

“While quite a few of our student organizations are operating in the hole and we could really use the dough, I’m afraid I’ll have to say ‘no’, Elsie,” replied Gordon. “I’m philosophically opposed to marketing credit cards on campus.”

“I didn’t know you were a philosopher,” quipped Elsie. “What’s your problem? You know the state of financial crisis the University is in due to dwindling state fiscal support. Plus, doing an exclusive deal with Highland will mean getting other credit card issuers off campus and give us total control. Students won’t have to worry about shopping around for the best deal—they’re giving our students a good one at an interest rate of prime rate plus 3.9 per cent, where most competitors offer prime plus 6 to 8 per cent. They also offer no annual fee, with no requirement for using the card, say four or six times per year, as many other banks do. The credit limit will be only $2,500.” It’s a win-win proposition.”

“No, you win, and I win, but our students lose,” insisted Gordon. “Remember, very few of our students have taken a course in personal finance. The bank will tell the students that ‘there’s no cost to you,’ but there’s the hidden costs of high interest payments on unpaid balances, high debt upon graduating, and ruined credit ratings in some cases.”

· “Those are the extreme cases,” retorted Elsie. “Highland assures me that, although many students lack credit experience, most use credit responsibly and handle credit cards as well or better than most adults. It’s a service our students want in a world where, like it or not, plastic is very important. Having a credit card can help students establish a credit history; assists them in meeting emergency needs such as a sudden trip home; makes paying for things like gas, food, rent, and books more convenient; and empowers them to become more financially responsible. Also, those who pay off their balances each month get the benefit of a short-term, interest-free loan. And, Highland pointed out that almost two-thirds of the nation’s parents think their children should have a credit card by age 18, mainly because it is a convenience for them since they need not continually send their kids money. I’ll tell you what, Gordon. I’ll let Student Activities have all of the new-account payments of $6 as well as three-fifths of the revenue from transactions. Why don’t you sleep on it and get back to me tomorrow?”

“I suppose I can do that,” Gordon reluctantly agreed. Then, recalling the biblical proverb that says, “In many counselors there is wisdom,” Gordon sought the advice of Alan Whitehead, Assistant Director of Student Activities.

“I think we should take Ms. Lombardi up on her generous offer,” opined Alan. “Even if our students graduate with average debts of around $1,000, given their likely earning power upon graduation, such levels of debt are easily recoverable, and the bank knows that—they aren’t in the business of issuing credit to those who cannot pay. And, Highland is right—college students who qualify for credit are no different from non-student customers. At the end of the day, the responsibility is with the cardholder.”

“But unfortunately, a lot of students, as well as adults, just aren’t responsible,” insisted Gordon. “Even for adults credit cards foster bad habits. People think that because they have a $1,500 limit they can buy something that costs $1,500 and take their time paying it off, rather than saving until they have $1,500.”

“Stop exaggerating,” exclaimed Alan. “I think students can grasp the principle of debt—these are the most intelligent individuals of their generation. You’re being nannyish—credit card issuers will get their offer in students’ faces one way or another—they won’t be stopped by your righteous efforts. We tell our 18-year olds they’re ready for the work force or college and that they can vote and even fight a war. Many work full or part time. Some are raising families. How can we tell them they can’t manage their own credit card? Let’s get with the program and get a piece of the action.”

Gordon went back to his office, his head swimming. He thought that maybe Alan had some valid points—maybe he was being too paternalistic. And, speaking of parents, didn’t they have some responsibility for their kids’ spending? Shouldn’t they think twice before allowing their youngsters to have credit cards with a $5000 spending limit? Too, the banks are responding to demand, most students are fairly responsible, and anyway, it is the bank that is taking the risk of higher levels of default. After all, the relatively high rates of interest are justified since credit card debt is a pretty high risk, unsecured loan facility.

Then he had an idea—perhaps he could use some of the funds Student Activities would get to institute a financial education program on campus to help students understand the responsibility of owning and using a credit card. In fact, he had heard that some of the big banks and credit card companies have accepted the responsibility for providing personal finance guidance for students through media such as posters on campus, “credit awareness” brochures, interactive online game shows, and even seminars on financial management. It seemed to him that it is in the banks’ interest to promote the sensible use of credit since the steady credit user is a far better long-term bet for the bank than the boom-and-bust spendthrift is. Perhaps Mountain State and Highland could partner on a program to deliver financial information and education.

But, then again, Gordon felt that Highland was offering a card with a credit level far in excess of what most students can manage—most are working in minimum-wage employment, if they’re working at all. And, it seemed to him that Highland, like all financial lenders, has an interest in promoting a moderate level of financial irresponsibility. Would he be dancing with the devil and be selling the students’ souls in the process?

Questions/exercises

1. Is it wise to let an 18-year old have a credit card? Summarize the pros and cons from the case. What other reasons for and against marketing credit cards to college students can you think of?

2. Who should be responsible for the wise use of credit cards by college students—the university, the financial institution extending the credit, the parents, the students themselves, government regulators, or some combination? Why?

3. Who are the stakeholders in any decision that Gordon makes regarding credit card marketing on his campus, and how is each affected?

4. What are the decision alternatives Gordon faces? Are there any others you can think of? Which alternative is most ethical and will help build the most trust and enhance the University’s reputation among Mountain State’s stakeholders?

*This case is strictly hypothetical; any resemblance to real persons, companies, or situations is coincidental. The author thanks Mr. Michael Durkin, Assistant Dean and Director of Student Activities at Stonehill College, for his valuable input.