A 2009 study by financial lender Sallie Mae found that today’s college students are spending more on credit than at any point in history: 84 percent of college undergraduates have at least one credit card – an increase of 8 percent since 2004.
But following the Feb. 22 national implementation of the Credit CARD Act, which was passed in May 2009, some students might change the way they view spending on credit.
This legislation includes provisions that are intended to protect younger spenders from falling into a credit trap. It bans credit card issuers from providing cards to consumers who are under the age of 21, unless the consumer has an adult co-signer or can present proof that they have a stable enough income to repay any debt.
Additionally, the act prohibits lenders from advertising with free merchandise on campus – including pizza, T-shirts and beach towels – as a means of enticing students to sign up for a credit card.
According to Phillip Swagel, who directs the Center for Financial Institutions, Policy and Governance at McDonough School of Business, the legislation is government’s way of preventing younger consumers from being fiscally irresponsible.
“It’s sort of trying to protect people from themselves,” Swagel said. “[Credit cards are] a great tool, but they can be a positive thing or a negative thing, depending on [people’s] use [of] them.”
A 2002 study by Georgetown’s now-defunct Credit Research Center found that among all age groups, people aged 18 to 24 were more likely to spend on credit than members of other age groups.
The study also concluded that while the average balance of a student credit card account is about one-fourth the size of the average credit account of an active, older adult, students had higher delinquency rates.
Swagel, who got his first credit card while in college, said that smart spending is a matter of planning.
“Spending on a credit card is, in a sense, spending on their future incomes,” Swagel said. “There’s no such thing as a free lunch – spending is spending.”
But Justin Lo Iacono (MSB ’10), outgoing chief executive officer of Georgetown University Alumni and Student Federal Credit Union, said that a bit of spending on credit can be positive for students.
“College is the first time many students become financially independent. There are certain advantages to having a credit card – most notably, it is a convenient way to build credit,” he said in an e-mail.
While the legislation will make it more difficult for profit-seeking credit card lenders to market on campus, it will not have a large effect on GUASFCU, according to Lo Iacono.
As the nation’s largest student-run credit union, with more than 11,000 total accounts, GUASFCU is different in that its members are shareholders who enjoy the company’s profits through lower banking fees, higher savings rates and lower loan rates, Lo Iacono said.
“GUASFCU does not currently offer an in-house credit card, so the legislation will not impact our organization,” Lo Iacono said. “GUASFCU will still be able to market on campus.”
Swagel said that the legislation could be positive or negative for student consumers, depending on their spending habits.
The act would make it more difficult for students to get a credit card, which might prevent irresponsible students from overspending, but it would also delay responsible spenders from building a positive credit score.
“Imagine someone who graduates at age 21 . and wants to rent an apartment. Having a credit card and having a credit history would make it easier to rent,” Swagel said. “That kind of building up a credit history and showing one’s financial responsibility – those are good things.”
But even with the provisions in the Credit CARD Act, it will not be enough to protect foolish spenders from falling into the credit trap, Swagel added.
“Someone who really wants to ruin themselves with debt, I guess, will still find a way,” Swagel said.
As an alternative to buying on credit, Lo Iacono said spend-wary students should use a debit card, which allows users to pull directly from an existing account, rather than delaying payment on a future bill.
“A debit card is a great way to manage one’s assets, especially since students can only spend the money in their account,” Lo Iacono said. “[This will help] them develop sound financial habits of not spending beyond their means.”
Representatives from the Chevy Chase Bank in Leavey Center were unable to be reached for comment.