Milwaukee – As a professional consumer counselor and the mother of a 19- year-old who is about to go off to college, Connie Kilmark has no qualms about what to do with the three-or-so credit card applications the young man receives in the mail each week.
“I shred them,” she said.
The last thing her son – or any new college student who probably won’t have a steady source of income for years – needs is the temptation to spend money he or she doesn’t have, said Kilmark, who runs the financial counseling firm Kilmark & Associates in Madison, Wis.
“He has more financial common sense than average because he’s heard me talk for so long,” Kilmark said of her son. “That doesn’t mean he has the habits ingrained inside of him. He’s still a beginner.”
As young adults go off to school, many will do so as beginners in the world of personal finance. Some, college-finance experts say, are certain to cave into the bombardment of credit-card solicitations they receive.
The trouble is that many won’t realize what they’re really doing when they use plastic. They’re making purchases by borrowing at high interest rates and, at the same time, establishing a credit history that will follow them for years.
“Certainly building credit – good credit – is essential in today’s world,” said Jane Hojan-Clark, director of financial aid at the University of Wisconsin-Milwaukee. “But for the individual who is not savvy and really is not financially literate, credit cards can be very dangerous.”
A national survey published last year by the college-loan organization Nellie Mae found that 76 percent of undergraduates started the 2004 school year with credit cards and that the average outstanding balance was $2,327. About 42 percent of freshmen had at least one credit card.
A survey of 2,300 UWM students last spring revealed that 86 percent had at least one credit card and that 23 percent of card holders carried a monthly balance of between $1,000 and almost $5,000.
That’s expensive debt – often at an 18 percent interest rate or more – on top of obligations students are accumulating from college loans and, in many cases, living on their own for the first time.
Students who make minimum monthly payments on credit cards often don’t understand the true cost of their borrowing, college financial experts said. Someone making monthly payments of $100 on a $3,000 balance for a card carrying an 18 percent annual percentage rate would need more than three years to retire the debt, and interest alone would amount to nearly $934, according to CarWeb.com’s online calculator.
Banks and card issuers pursue college students because they represent potential new, long-term customers.
“It’s an affinity thing,” said Mark McCarthy, dean of student development at Marquette University in Milwaukee. “They would like to be the bank or credit-card company that a student starts with, knowing that for many of us, once you lock into a credit card or you end up paying an annual fee, there is a greater likelihood that you’ll maintain that card over a longer period of time.”
Perhaps surprisingly, students tend not to be considered high-risk borrowers by lenders, said Marie O’Malley, vice president of marketing for Nellie Mae. “They are in college. It’s anticipated that they will graduate and get jobs, and if they do incur any debt while in school, they will be able to pay it off when they graduate. And there is also an underlying assumption with some card companies that the parents will step in if their child gets in trouble.”
