January 2012 was one of the most memorable months of my life. It was the month I turned 18 and also when I expected most of my college admission decisions to arrive. I paid close attention to the mail each day, hoping for a birthday card or acceptance letter. However, I was puzzled shortly after my birthday when I received a letter from South Dakota. I had no friends or family in that state nor had I applied to any colleges there.
The letter was from a small bank in the Midwest offering me a credit card. Even with zero knowledge of my financial ability and no inquisition into whether or not I was employed, I was still eligible for the company’s card. I researched its proposal further and quickly discovered why it was so willing to extend me credit: The credit card I was offered carried an exorbitant interest rate near 30 percent.
This annual percentage rate is extreme compared to the national average of 14.89 percent, according to creditcards.com. To put these rates into perspective, a $1,000 balance on a card with a 30 percent APR would become a $1,300 debt in just one year if no payments are made to lower the balance. And after two years, $1,800.
I, along with many other newly legal adults, was being punished with a high interest rate because of my age. Rather than helping me build a strong credit history, banks like the one in South Dakota designed a credit card intended for my financial failure and for its profit.
After the letter from South Dakota, I received a handful of other letters from banks all across the country. This constant stream of letters was overwhelming and I briefly considered throwing them all away. However, I believed I could find a credit card to use responsibly and that the benefits of cautious credit card use outweighed the risks. I considered my credit score, a report of an individual’s credit quality and history on a scale of 300-850.
A credit score is an important factor when applying for student loans, mortgages, auto loans, and is often taken into account by landlords and certain employers. I saw these credit card offers as an opportunity to establish and build my credit score much earlier than those who wait until after college who will inevitably face many more financial obstacles than one who has been using a credit card responsibly since they turned 18.
Jonathan Scott teaches various finance courses at the Fox School of Business and frequently stresses the importance of credit scores to his students.
“In my Investing for the Future class, the students learn quickly that their FICO score has a huge impact on their future: mortgage rates, credit card rates and auto rates,” Scott said. “Along with other things they wouldn’t think about such a phone contracts, apartment leases, etc.”
Many students at Temple have reaped the benefits of establishing a credit history and have found little difficulty in the process. However, despite the benefits, statistics indicate that fewer college students are choosing to open credit cards than in past years – dropping from 42 percent in 2010 to 30 percent in 2013, according to Sallie Mae’s website.
Emily Demyanovich, a junior actuarial science major, said her credit card habits show that she is financially dependable.
“I pay off my bill every month on time so I don’t have to ever worry about interest,” Demyanovich said. “If you’re smart about it, there is no reason to worry about debt.”
The Credit Card Accountability, Responsibility, and Disclosure Act was signed in 2009 – a statute that was supposed to set limits to the types of marketing and offers companies can offer to young adults aged 18-21 – but has not stopped the advertisement and availability of credit cards on college campuses.
Students who do own at least one credit card may have already had difficulty in maintaining good financial habits. An annual report by Sallie Mae called “How America Pays for College” determined that 68 percent of American college students carry a balance on a credit card and 17 percent already have more than $1,000 of credit card debt.
The Federal Reserve declared in October 2014 that the total amount of outstanding credit card debt in America is more than $880.6 billion dollars. Most of this debt has been accrued by those who use their credit cards irresponsibly and allow their balance and interest to accumulate month to month. Credit card use requires strict discipline and can quickly cause financial hardships when used improperly. However, those that are willing to face the challenge of building a strong credit score will benefit in the long term compared to someone who delays until after college to establish a history.
Owning a credit card is about freedom and responsibility and those who begin the process early generally find themselves more financially independent. As a student progresses through college, becoming independent is increasingly important, as does the responsibility of being able to spend whatever, whenever you want.
The Conference Board, a non-profit research organization, recently announced that U.S. consumer confidence is at its highest rate since August 2007, which may indicate that the American economy is growing and that consumers are feeling increasingly confident about spending their hard-earned money. While in college, young adults should take the opportunity to learn about how building good credit is a responsible step for students who are testing the water with consumer credit to build their professional and financial success.
Michael Carney can be reached at firstname.lastname@example.org