Credit card marketers are aggressively targeting college-age consumers this fall before the new laws that protect them go into effect, according to San Francisco-based Consumers Union, the nonprofit publisher of Consumer Reports.
The group is warning students to beware of the slick marketing campaign and think twice before signing up for a credit card that could result in large and high-interest debt by graduation day.
The credit card companies have just five months left to sign up young borrowers before new federal regulations restricting aggressive marketing go into effect. To counter the onslaught, Consumers Union has assembled a "Credit Card Care Package" with tips for students and their parents at www.CreditCardReform.org.
"For the past 15 years or so, credit card issuers have increasingly ramped up their marketing to students on college campuses," says Lauren Zeichner-Bowne, staff attorney for Consumers Union. "In addition, their underwriting of young people (and actually all people) has become less important -- resulting in high credit lines being granted to people irrespective of their ability to pay."
Marketing tactics include setting up tables in the student union, where issuers hand out t-shirts, school supplies or even iPods in exchange for a student filling out a credit card application, Zeichner-Bowne says. The issuers are visible at most events on campus, and also sometimes sponsor events themselves. In addition, the card companies sometimes pay student groups to hawk cards at their events.
Starting in February, credit card companies will be prohibited from providing gifts on campus in exchange for filling out a credit card application, and colleges will be required to disclose any marketing contracts they have with card issuers. Credit card companies will not be allowed to issue credit cards to people under age 21 unless the applicant has an older co-signer or can demonstrate their ability to repay card debt.
One of the biggest problems is that many schools have marketing agreements with the card companies in exchange for financial compensation, Zeichner-Bowne says. "The problem with this is that many of the agreements are set up so that the more students who sign up and the more they spend on their cards, the more money the school gets," Zeichner-Bowne tells Marketing Daily. "It creates a perverse incentive. The law will not prevent schools from engaging in marketing agreements with card companies, but it will require the card companies and colleges to publicly disclose all marketing agreements."
After the new laws go into effect, it's likely the credit card companies will target parents and other people over the age of 21 to cosign, Zeichner-Bowne says. "We want to get the message out that people over the age of 21 should not cosign for their friends," she says. "This can have detrimental consequences for the economic health of the cosigner. If a parent or guardian decides that their kid needs a card they can make that choice, but a 22-year-old should not co-sign for her 20-year-old roommate."
According to Sallie Mae, 84% of college undergraduates have at least one credit card, while more than half carry four or more. College graduates leave school with an average of $4,138 in credit card debt -- a 44% increase since 2004. Only 17% of students pay off their balances each month, with the majority paying interest rates averaging 14% on their mounting debt.
For the average student who graduates with $4,138 in credit card debt, paying off that balance could take many years, especially if they only make the minimum payment. Students who make the minimum payment (typically 2%) on a $4,138 balance with a 14% interest rate, would end up paying $5,125.42 in interest over 280 months to pay off their bill.