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Researchers and educators are increasingly interested in how college students finance their education, as students are relying on student loans and credit cards more than ever before. Using a sample of 1,244 students, the present study analyzes the credit card habits and purchase patterns of college students, differentiating those that are considered financially at-risk (FAR) from those who are not financially at-risk (NFAR). Results of a series of independent sample t-tests suggest that FAR students use their cards with greater frequency for a variety of different purchases (both necessities and non-necessities). FAR students also engage in less responsible behaviors based on a measure of credit card use. These findings provide insights into how FAR students become FAR, and may suggest avenues for more targeted intervention in the future.

College students are relying on student loans and credit card debt more than ever before. A variety of forces are impacting their reliance including tightening credit, a sluggish economy, and the continuing rise in the price of college. For example, recent information from The College Board (2009) shows that for private not-for-profit colleges, the weighted average cost of tuition, fees, and room and board has risen to $35,636. At public four-year colleges, the inflation-adjusted average tuition and fees for in-state students has increased 35% since 2001; the largest increase for any five year period since data began to be collected 30 years ago (College Board, 2009). To pay for the escalating cost of college, students are required to carry greater amounts of debt. In 2009, two-thirds of college students borrowed to pay for college, carrying an average debt load of $23,186 by the time of graduation (Chaker, 2009). These numbers are in striking comparison to only over a decade earlier when 58% of students borrowed to pay for college, with a far lower debt load of $13,172 (Chaker, 2009).To acquire an education today, the end result is that many undergraduates find themselves stuck in a "debt to diploma" system (Draut, 2005).

The related pressures of credit card debt intensify the consequences of student loan borrowing and may compromise students' ability to complete their degree. College students today have grown up in a world of plastic, seeing credit as a way of life. According to Sallie Mae's National Study of Usage Rates and Trends (2009), 84% of undergraduates have a credit card, and the average number of cards carried per cardholder is 4.6. In addition, the average undergraduate carries over three thousand dollars in credit card debt, the highest level since the company began collecting data in 1998 (Sallie Mae, 2009). Credit card debt levels of this magnitude suggest that many college students use credit cards as a source of "short-term revolving credit," being called "installment users" (Danes and Hira, 1990, p. 225). Previous research has identified different types of credit-card users: convenience users and installment users (Mathews and Slocum, 1969; Slocum and Mathews, 1970; Mansfield, Pinto, and Parente, 2003). Convenience users utilize the credit card as a substitute for cash and pay the balance in full each month (Danes and Hira, 1990; Mansfield et al., 2003). Installment users carry a monthly balance and range from mild debtors to serious debtors (Lea, Webley, and Walker, 1995; Pinto, Mansfield, and Parente, 2004).

There is a downside to using credit cards as a source of installment debt. Student credit card debts and student loans often consume all the disposable income of many young graduates just starting in the work force. Financial experts estimate that nearly half of all students who graduate from college have an "unmanageable debt burden" with repayments exceeding 8% of their monthly income (Zaff, 2004). According to Draut (2005), "The rise in credit card debt combined with massive student loan debt means that 25 cents of every dollar of income goes to paying off debt.. .The explosion in credit card debt is linked to the earnings crisis hitting young adults" (p. 12). Further concerns have been raised regarding the impact of increasing debt burdens on whether or not students are able to complete their degree, often called student persistence behavior (Pinto, Parente, and Palmer, 2001). Recent research by Robb, Moody, and Abdel-Ghany (2011) suggested that financial factors (e.g. credit card use behavior, student loan debt, and the presence of other forms of debt) play a significant role in student persistence behavior as well as in student perceptions of debt.

Despite these problematic figures, it is important to acknowledge that not all college students carry high levels of debt or mismanage credit. In fact, findings suggest that the majority of students use their credit cards responsibly (Lyons, 2004). However, previous research has identified a group of college students who have been called "financially at-risk" (FAR) based on their chronic mismanagement or misuse of their credit cards. The purpose of this study is to explore whether or not FAR students differ significantly from non-financially at-risk (NFAR) students in terms of their credit card use behaviors. Examining specific spending behaviors should provide some insight into how FAR students become FAR. Further, credit cards may effectively serve as a proxy for other forms of consumer debt, giving us a general sense of how FAR students might behave in other domains of financial decision-making.

Literature Review

Credit Card Use

High rates of credit card possession are documented across numerous studies of college students (Manning and Kirshak, 2005; Nellie Mae, 2002; 2005, Sallie Mae, 2009), and the question of how students use their cards has received some attention in the prior literature. Roberts and Jones (2001) developed a 12-item scale of credit card use that indicated the degree to which students use their cards responsibly. These authors used the scale to analyze compulsive buying behavior among college students, with the idea that credit card use might have a moderating effect on the relationship between money attitudes and compulsive buying.

Earlier research suggested that credit cards may serve as spending stimuli, encouraging individuals to spend more than they would if a credit card was not available (Feinberg, 1986; Ritzer, 1995). Research by Roberts and Jones (2001) supported these findings, suggesting that credit card usage served as a mediator in many cases. Specifically, the research indicated that greater credit card use was associated with a stronger relationship between money attitudes and compulsive buying behavior, demonstrating a facilitating effect on the part of credit cards (Roberts and Jones, 2001).

Research also documents the types of products and services consumers purchase with their cards. There has been considerable discussion on whether or not college students use credit cards primarily for need-based expenses or to fund their lifestyle (Pinto, Parente, and Palmer, 2000). Sallie Mae (2009) reported both need-based and non-necessity types of purchases. Ninety-two percent of undergraduates reported using credit cards to pay for some type of college expense (e.g., textbooks, school supplies, commuting costs). The other top expenses purchased on credit cards included: food (84%), clothing (70%), and cosmetics (69%).

Earlier data supports Sallie Mae's findings. Information presented by the Government Accountability Office (GAO, 2001) suggested that credit cards were primarily being used to purchase books and supplies for school, food, and clothing. Some respondents, however, reported entertainment expenses as well. These findings were reinforced by survey research from Louisiana State University in which students reported using their credit cards to finance necessities such as clothing (75%), food (71%), and tuition, books, or supplies related to their education (70%), as well as auto related expenses (75%) and non-necessities such as entertainment (50%) (Lawrence et al., 2003).

One caveat to the discussion on how consumers use credit cards is the distinction between luxury items (or sometimes called "extras") versus necessities. According to Schor (1998) Americans' definition of what constitutes a "need" has clearly changed from generation to generation. Modern day consumerism has changed what we "want" into what we "need." For example, Pinto et al. (2000) reported on focus group data in which college students commented that they do not use credit cards to spend money on luxuries, but rather only purchase necessities. However, when asked to name their purchases, responses included numerous "non-necessities items" such as, going out to restaurants and bars, going on vacation, shopping for new fashions, and purchasing electronics and gifts.

Persistence Behavior

College costs rose dramatically over the past decade (College Board, 2009), and available assistance for students is increasingly in the form of student loans, which must be repaid, rather than grants (Baum, 2003). Available evidence suggests that increases in family income, loans and grants failed to keep pace with increasing college costs (College Board, 2005; Heller and Marin, 2002), indicating that students may be forced to seek out alternative forms of financial support to cover education expenses. Credit cards are more available to college students, and researchers have considered how credit card use might influence student persistence to degree and attitudes towards debt (Schemo, 2002).

Previous studies of persistence behavior recognized the significance of several socio-demographic and academic factors such as student background, GPA, gender, race/ethnicity, and campus integration/involvement (Cabrera, Nora, and Castaneda, 1992; Haynes, 2008; Spady, 1970; Tinto, 1993). Many recent studies expanded upon this research by considered the role of relevant financial factors as well, including financial aid and parental income in a model of student persistence behavior (Bradburn, 2002; Braunstein, McGrath, and Pescatrice, 2001; McElroy, 2005; Nora, Barlow, and Crisp, 2006; Reynolds and Weagley, 2003; Wohlgemuth, Whalen, Sullivan, Nading, Shelley, and Wang, 2007). Previous studies in the area of consumer debt (viewed separately from student loan debt) indicated that credit card debt and student loan debt are positively correlated (Pinto and Mansfield, 2006), though the nature of this relationship has not been explored in detail.

The influence of consumer debt on persistence was explored indirectly by Pinto et al. (2001). The researchers studied the relationship between credit card usage, student employment, and academic performance. Surveying over 1000 students from three campuses in the Northeast, they divided their sample into high versus low academic performer categories (based on GPA) and evaluated the differences between the groups in terms of credit card usage (number of cards and total outstanding balance), hours of employment, students' perceived need for employment and students' anxiety toward credit card usage. Their findings revealed specific differences with regard to how the two groups perceived credit cards impacting their college performance. The low academic performer group indicated that their main reason for employment was to pay off their credit cards. The high performer group reported higher levels of anxiety about credit than the low academic performer group.

More recent research explored the relationship between consumer debt and persistence more directly. Robb et al. (2011) indicated a significant relationship between self-reported credit card use behavior and student perceptions of debt and reported persistence behavior. Students who reported less responsible credit card use were more likely to indicate that the emotional burden of their student loan debt would make it difficult to persist, and the same results were noted for consumer debt. Further, less responsible credit card use was associated with a greater likelihood of students reducing their credit hours or dropping out for financial reasons. These findings suggest that misuse of credit cards may be problematic from the standpoint of college student persistence, as irresponsible, or "at-risk" behaviors add to an already significant financial burden.

Financially At-Risk College Students

Lyons (2004) classified college students as "financially at-risk" if they met one or more of the following characteristics:

1. Have credit card balances of $1,000 or more,

2. Are delinquent on their credit card payments by two months or more,

3. Have reached the limit on their credit cards, and

4. Only pay off their credit card balances some of the time or never.

Lyons (2004) found that FAR students were more likely to be female, black, and/or Hispanic, and financially independent. Further, FAR students were more likely to receive need-based financial aid, to hold $1000 or more in other debt, or to have acquired cards through the mail, at a retail store, or on campus. Work by Grable and Joo (2006) supported these findings, as African American students held greater levels of debt, and debt was further related to negative financial behaviors and stress.

The size of this "at-risk" group of college students has also been examined to determine if it represents a significant proportion of college student credit card users. Lyons (2004) found that 37% of the 835 graduate and undergraduate students surveyed at the University of Illinois met the criteria for financially-at-risk. Pinto and Mansfield (2006) extended the work of Lyons (2004) by including data on student loan debt and prioritization of debt repayment with information on credit cards. They surveyed undergraduates at eight four-year institutions (four public and four private) in the eastern half of the United States. In their study, they found that 14% of students from their final sample of 1,441 students met the financially-at-risk profile. Results from their analysis suggested that FAR students held higher student loan balances, and indicated that they would give priority to the repayment of credit card debt over student loan debt (Pinto and Mansfield, 2006). While the actual percentage of financially at-risk college students (FAR) varies by institution, there is no question that it represents a significant proportion of college student credit card users.

This earlier research provides a clear differentiation between FAR and NFAR students in terms of demographic and financial factors, but does not address the question of how FAR students differ from NFAR students in terms of spending and attitudes towards debt (which may provide some insight into how students actually become FAR). With respect to how FAR students actually become FAR, there are two potential factors to consider. First, FAR students may be less responsible than other students, and their at-risk status is the result of their irresponsible financial behavior. Second, FAR students may be as responsible as other students, but face resource constraints that force them to rely more on credit cards out of necessity rather than desire.

The present study extends the work of Lyons (2004) and Pinto and Mansfield (2006) by studying the differences between FAR students and NFAR students in how they use their credit cards. It also incorporates a measure of credit card use and general purchase behaviors into the analysis, while considering potential implications for college student persistence to degree. Whereas previous analyses have examined the characteristics of FAR students, and provided some insight into how they differ from non-FAR students in terms of income and debt, little is known about how FAR students differ from NFAR students in terms of general credit card use. "Such an investigation would allow us to determine what proportion of students are using their cards for convenience (e.g. to earn airline miles or other reward points) versus those that are using them because of genuine financial need (i.e., they have no other source of funds)" (Pinto and Mansfield, 2006, p. 30). The goal of this analysis is to understand more about how FAR students become financially at-risk. That is, do they generally rely on credit cards to assist with necessary expenditures (such as education expenditures) or are they using credit cards for expenditures that are less necessary (such as entertainment or eating out)? Examining self-report data on credit card use and purchasing behavior should provide some insight into the relative responsibility of their behavior.

The primary research question of this study is: Do FAR students differ significantly from NFAR students in terms of their overall reported credit card spending patterns? In addition, several sub-questions are proposed:

• Are FAR students using credit cards to cover "necessary" expenditures (e.g. food, clothing, living expenses, education, car maintenance and gas) with greater frequency than NFAR students?

• Are FAR students using credit cards to cover "unnecessary" expenditures (e.g. eating out, entertainment, travel, and electronics) with greater frequency than NFAR students?

• How different are FAR students from NFAR students in terms of risky credit card use?

Method

An online survey was e-mailed to the current student population of two major universities, one in the Southeast (student body of approximately 22,000) and one in the Midwest (student body of approximately 25,000), during the Spring 2007 semester. A total of 3,008 usable surveys were obtained (a response rate of roughly 12%). Each respondent completed an 83-question survey covering a variety of demographic and personal financial issues. The sample was restricted to students under the age of 25 in the hopes of capturing a more representative sample of traditional students in the United States, resulting in a usable sample of 2,197 college students (FinAid, 2010; LAO, 2009). This sample was further restricted to focus on those students who reported holding credit cards (n = 1,244). Demographic characteristics for the reduced sample roughly mirrored the existing student populations with the exception that a larger proportion of the sample was female relative to the actual student population (68% versus 52.5%) and a larger proportion of students were upperclassmen. Demographics for the sample are presented in Table 1.

Similar to research by Pinto and Mansfield (2006), the present study defines students as being Financially At-Risk (FAR) if they display any one of the following three behaviors: 1) having at least one credit card at the limit, 2) making only the minimum payment on their credit cards, or 3) carrying a credit card balance equal to or greater than $1,000. All other students are considered to be Non-Financially At-Risk (NFAR). Of the 1,244 students analyzed, slightly less than one-third (31%) are classified as being financially at-risk. Student risk behaviors are broken down by type in Table 2. FAR students are distributed fairly evenly across the different risk behaviors, though a larger proportion note carrying a balance of $1,000 or greater.

TABLE: Table 1: Descriptive Statistics for the Entire Sample (N = 1,244)

Table 1: Descriptive Statistics for the Entire Sample (N = 1,244)

Variable Frequency Variable Frequency All FAR NFAR All FAR NFAR Female 68% 34% 66% Financially Independent 23% 47% 53% Male 32% 25% 75% Financially Dependent 77% 26% 74% White 87% 28% 72% Employed 65% 35% 65% Other Race/Ethnicity 13% 51% 49% Not Employed 35% 24% 76% Receive Financial Aid 63% 36% 64% Possess Other Loans 16% 51% 49% No Financial Aid 37% 22% 78% No Other Loans 84% 27% 73% Year in School Freshman Sophomore Junior Senior 14% 21% 30% 35% 9% 16% 31% 43% 16% 23% 29% 32% Parent's Income High Income Middle Income Low Income Unknown 37% 37% 20% 6% 29% 41% 27% 3% 41% 36% 17% 6% Credit Card Use Convenience Installment* 59% 41% Parent's Education High School Some College College or More 13% 27% 60% 16% 33% 50% 11% 25% 64% * Installment users (also known as revolvers) are defined as those students who carry some balance over from one month to the next on any of their cards during the survey period.

TABLE: Table 2: Student Risk Behaviors by Type (N = 1,244)

Table 2: Student Risk Behaviors by Type (N = 1,244)

Variable Frequency Percent Have at least one credit card at the limit 210 17% Make only the minimum payment 179 14% Carry a credit card balance equal to or greater than $1,000 226 18% Students classified as financially at-risk (met one or more of the above criteria) 383 31%

Credit Card Use

The credit card use scale developed by Roberts and Jones (2001) is used to analyze the degree to which students report engaging in risky credit card use behavior (see Appendix). Items from the scale are summed to create a composite use score. The internal consistency (alpha = .83) of the credit card use measure is quite good for the present sample, and is similar to that demonstrated by Roberts and Jones (2001; alpha = .81). Higher scores on the composite measure indicate more responsible (less risky) credit card use behavior while lower scores indicate less responsible (riskier) credit card use behaviors.

Purchase Behavior

During the course of the survey, students were asked to respond to the question, "What do you usually purchase with your credit cards? (Check all that apply)", with a corresponding list of eighteen potential categories of spending behavior (i.e. eating out, entertainment, clothing, emergency expenses, etc.). Purchase behavior is further explored by the addition of two questions. The first question asked students whether they ever charged school items (i.e. textbooks, tuition, fees) because student financial aid was insufficient to cover the costs. The second question asks students whether they use their financial aid to pay their credit card bills.

Results

Independent sample t-tests are used to analyze the main research question: do FAR students differ significantly from NFAR students in terms of their overall reported credit card spending patterns? (See Table 3) Looking at the entire sample, students display a mean credit card use score on the composite measure of 46.8 out of 60. When the sample is divided into FAR versus NFAR students, FAR students display a significantly lower score on the composite measure (38.8 versus 50.4; t = 26.31, p < .001), indicating less responsible credit card use overall from FAR students. In terms of specific spending behaviors, FAR students report greater use of cards across the board (that is, a larger proportion of FAR students indicate engaging in many of the spending behaviors analyzed). Among those behaviors where differences proved to be statistically significant, FAR students display greater spending in every category except for use of credit cards for emergency purposes only.

A greater proportion of FAR students reported using credit cards to pay for tuition and fees (20% versus 12%; t = 3.60, p < .001), clothing or accessories (78% versus 59%; t = 6.55, p < .001), eating out (67% versus 48%; t = 6.29, p < .001), auto expenditures (75% versus 64%; t = 3.93, p < .001), textbooks and school supplies (47% versus 40%; t = 2.17, p < .05), cosmetics or personal items (40% versus 27%; t = 4.57, p < .001), electronic equipment (27% versus 20%; t = 2.57, p < .05), furniture (18% versus 12%;t = 2.80,p< .01), travel (42% versus 28%; t = 4.71,p < .001), groceries (57% versus 44%; t = 4.19, p < .001), entertainment (42.5% versus 32%; t = 3.76, p < .001), and living expenses (including internet and cell phone; 20% versus 11%; t = 4.36, p < .001). FAR students were not statistically different from NFAR students in terms of expenditures for computers and related items, Greek involvement, general books, media purchases, or other expenditures.

The data suggest that a greater proportion of FAR students report charging school items on their credit cards due to insufficient support from financial aid (46% versus 25%; t = 7.62, p < .001). Similar results were noted for the question of whether students use their financial aid to make payments on their credit cards (27% versus 8%; t = 9.1 l,p<.001).

TABLE: Table 3: Breakdown of Credit Card Use Behaviors (N = 1,244; FAR versus NFAR):

Table 3: Breakdown of Credit Card Use Behaviors (N = 1,244; FAR versus NFAR):

Variable Overall NFAR FAR T-Statistics Tuition and Fees 183(15%) 106(12%) 77 (20%) 3.60*** Clothing/Accessories 805 (65%) 507 (59%) 298 (78%) 6.55*** Eating Out 668 (54%) 412(48%) 256 (67%) 6.29*** Computer and Related Expenses 247 (20%) 160(19%) 87 (23%) 1.69 Car Expenses (gas/maintenance) 842 (68%) 553 (64%) 289 (75%) 3.93*** Greek Expenses 56 (4.5%) 40 (5%) 16 (4%) 0.37 Textbooks/Supplies 528 (42%) 348 (40%) 180(47%) 2.17* Cosmetics/Personal 389(31%) 235 (27%) 154(40%) 4.57*** Electronic Equipment 275 (22%) 173(20%) 102(27%) 2.57* Furniture 173 (14%) 104(12%) 69(18%) 2.80** Travel Expenses 404 (32%) 244 (28%) 160(42%) 4.71*** Emergency Only 218(17.5%) 168(19.5%) 50(13%) -2.77** Books (general) 191 (15%) 130(15%) 61 (16%) 0.37 Groceries 598 (48%) 380 (44%) 218(57%) 4.19*** Videos/DVDs/CDs 288 (23%) 190(22%) 98 (26%) 1.36 Entertainment Expenses 435 (35%) 272 (32%) 163 (42.5%) 3.76*** Rent/Utilities/Cable/ Internet/Cell Phone 174(14%) 96(11%) 78 (20%) 4.36*** Other 55 (4%) 43 (5%) 12 (3%) -1.47 Charge School Items? 389(31%) 213(25%) 176(46%) 7.62*** Pay With Financial Aid? 173(14%) 70 (8%) 103 (27%) 9.11*** Continuous Mean (Std Dev) Mean (Std Dev) Mean (Std Dev) Credit Card Use Score± 46.84 (8.96) 50.41 (6.55) 38.81 (8.42) 26.31*** * p < .05, ** p < .01, *** p < .001 ± Higher scores correspond to more responsible credit card use

Discussion

The primary objective of this study was to examine the credit card spending habits of FAR students. A secondary goal was to determine whether or not FAR students differ significantly from NFAR students in how they use their credit cards. Our findings suggest that FAR students appear to use credit cards with greater frequency in a variety of different spending categories. For example, significantly larger percentages of FAR students reported using credit cards for clothing, eating out, and travel, but a larger percentage of FAR students also reported using credit cards to cover tuition, groceries, and auto expenses. These results alone are not surprising given that more FAR students come from low to middle-income households and report being financially independent. However, if the greater credit card use among FAR students were simply need driven, it might be expected that differences would only exist among necessary expenditures, which is not the case. The data show a greater reliance on debt among FAR students. They use credit cards more often than NFAR students to fuel their lifestyles with expenditures such as eating out, going on vacation, and buying clothing and cosmetics.

Not only do FAR students use credit cards with greater frequency, they also engage in riskier credit card use behaviors relative to NFAR students. The data indicate that when compared to NFAR students, FAR students more often: 1) make only the minimum payment on their cards; 2) make delinquent payments; 3) go over their credit limit; 4) use their credit card(s) for installment purchases; and 5) use their credit cards for cash advances. Each of these risky behaviors contributes to higher costs of borrowing, unnecessary fees, rate increases, and greater likelihood of future financial difficulties for college students. Previous research suggests that growing financial burdens may have an adverse impact of student's persistence to degree (Lyons, 2008; Robb et al., 2011). College students are already faced with significant costs associated with obtaining a degree, an issue that can be exacerbated by irresponsible credit card use. Many students may underestimate the extent to which credit card debt may be a factor in later life decisions such as purchasing a home or automobile. The results are also supportive of previous findings suggesting that many FAR students face a form of "double jeopardy" when it comes to education expenses (Pinto and Mansfield, 2006). Students who are FAR indicate using cards due to the insufficiency of financial aid and also report using financial aid money to cover their personal debts.

The results should be considered carefully as there are several limitations that impact the generalizability of the present findings. All data are self-reported and there is potential for sampling bias. As the survey was e-mailed to the general student population as a whole, respondents may be those students who are more inclined to care about the subject matter or the incentive (chance to win a mall gift certificate). Further, the sample collection occurred at one point in time at two major (though regionally different) state institutions.

Aside from practical concerns over excessive credit card debt and potential impacts on later life decisions and persistence to degree behavior, it is important to consider what these data might suggest about students' other financial behaviors. That is, does credit card use behavior provide us with some insight into how these consumers will handle other financial instruments later in life?

Conclusions/Implications:

Previous studies have provided insight into what types of students are more likely to be financially at-risk. Results from the present study increase our understanding of this group by looking at specific credit card use behavior and spending decisions. These data combined provide administrators and educators with a greater understanding of FAR students, and may be a useful starting point in terms of targeted interventions in the future. Whereas the present analysis is limited to credit card use behavior, to the extent that this behavior serves as a proxy for other financial decisions later in life, understanding this information may be crucial to understanding how FAR students may be expected to behave after college. Further, how college students use their credit cards has a significant impact on their long-term financial well-being as credit scores may be used by lenders, insurers, and employers.

From Consumer Alert

College kids and credit cards have been in the news lately, following a June 1999 report by the Consumer Federation of America (CFA) that blasted card issuers for luring unsuspecting students into debt. Sociologist Robert Manning, the author of the CFA study, was quoted in a Reuters story as saying: "The unrestricted marketing of credit cards on college campuses is so aggressive that it now poses a greater threat than alcohol or sexually transmitted diseases."

Most news stories took cues from Manning and touted the risks of credit cards for students. Articles used phrases such as "pushing cards on cash-strapped college students," "addicted to plastic," "the rubble of financial ruin," "financial shackles," "dark clouds of debt." Some media events linked student suicides with credit card debt. Several lawmakers--at the federal and state level--responded by calling for curbs on lending to those under 21. Some legislative proposals would not allow students under 21 to apply for a card or to have the credit limit raised without parents' permission. Other measures would restrict the marketing of credit cards on college campuses.

The now common practice of card companies' offering students credit cards is being portrayed as a way to lure students into an addiction to piling on debt they can't handle. Many college students--and their parents--however, tend to take a more balanced look at the issue and consider not just the risks but the rewards.

There are a lot of reasons why parents of away-from-home college kids want them to have credit cards. Parents have greater peace of mind knowing their child won't be destitute if there's a budget shortfall during the month. If student loan disbursements are held up for longer than expected, students can survive by using their credit card for expenses.

In the past, parents had to handle those crises by such means as wiring money that has to be picked up or sending a money order that needs to be cashed.

Students also may find credit cards invaluable for travel home and for unexpected expenses--to purchase airline tickets if there's a family crisis, or if a student gets stuck in a strange city overnight because of canceled planes, or in case of a car breakdown.

Getting a credit card in college is also a way to build a credit record that can allow a graduate who gets a full-time job to qualify more readily for a car loan and then, perhaps later, for a mortgage.

All of those benefits, of course, don't come without risk. Just about every product or service has trade-offs involved--that is, an upside and a downside. For instance, using a car for transportation also means that there is a risk that the person will get in an accident. Renting a video can entail a modest financial risk--forgetting to return it can mean hefty late fees. If a person misuses a product or service, it almost always increases the risks, whether those risks are physical or financial.

Misuse of credit cards, not the fact of having a card, may cause some students to get in debt over their heads. If the student doesn't have the income to pay more than the minimum payment due and continues to pile up charges on the account, that can present real problems. Paying late on a credit card bill not only may warrant a hefty late fee, but also can put a blot on a person's credit history.

Blaming credit card issuers for some students' credit troubles, and calling college credit card misuse a bigger problem than "alcohol and sexually transmitted diseases" are guaranteed to get headlines and gain some lawmakers' support for new restrictions on card issuance. However, such hyperbole won't help in getting students on the right track in using credit cards responsibly.

Students going off to college are usually 18 years old. At that age, they can vote and go to war. They are also making hard decisions about school and work, relationships, and goals. Increasingly, too, students at that age are obligating themselves for huge student loan debts. It's fairly common now for graduating seniors to be faced with $40,000 to $50,000 in student loans to repay once they start working.

College is a place and a time that prepare students not only for earning a living but also for learning how to live independently. College provides students with critical lessons in personal responsibility and in setting limits--attending classes, getting up in time for morning classes, studying for exams and finishing assignments, taking care of food needs and laundry, balancing work and play, and a host of others. Cutting classes, cramming, not handing in term papers, partying instead of studying, are behaviors that may get students off-track in their college careers, unless they learn from those experiences. For college students, learning how to manage money--to set spending limits and to live within one's means--is a necessary part of their lives away from home.

Some parents try to prepare their kids to handle personal finances way before sending them off to college. They may teach their children at an early age how to "budget" their allowance or put gift money into their own savings account for a special purpose instead of spending it right away. With teenagers, parents may help them decide whether to work part-time and how to budget that income. As students start preparing for college, experts advise parents to include in the money-management discussions sessions on credit card use, including information on finance charges, fees, and minimum monthly payments. Working through some hypothetical examples can bring the point home about the need for responsible use of credit cards.

Few high schools help prepare teens for living on their own, whether working or attending college. Some schools may include a personal finance course as an elective, but that may be all. Yet innovative programs that integrate personal finances with teenagers' interests are available in some high schools and increasingly on the Internet.

Colleges are beginning to find that orientation programs can include "survival skills," such as learning how to handle money, including credit card debt. Special student presentations on credit card use and abuse can be effective in pointing out some of the pitfalls.

Early parental guidance on money management, supplemented by high school and college programs, can help prepare young adults to use credit responsibly. How well they learn those lessons will be critical. They'll be on their own soon, and soon, too, their only "classroom" will be real-life experience.

Electronic copy available at: http://ssrn.com/abstract=2248804

College Students’ Knowledge and Use of Credit

Joyce E. Jones 1

Results from this exploratory study of incoming college freshmen indicated many students already had access to credit or had acquired debt. Sixty-two percent had access to a credit/charge card and just over half (50.9%) had some type of debt. Older students had significantly more credit/charge cards, as well as higher levels of debt. Single, never married students tended to have lower levels of debt than currently/formerly married students. Most students in this study knew little about credit and credit knowledge was not significantly related to debt levels or access to credit/charge cards. The findings suggest that credit education may be needed before students enter college (or shortly thereafter) to help them make informed decisions and avoid having excessive debt affect current/future financial security. Keywords: College students, Credit, Credit cards

1 Joyce E. Jones, Ph.D., Associate Professor, Department of Design, Extension Specialist, Personal Finance, 333 Human

Environmental Sciences, Oklahoma State University, Stillwater, OK 74078, phone 405-744-6282, fax 405-744-1461, e-MAIL: [email protected]

Introduction Credit is a part of most college students’ lives. Having access to credit can provide a convenient way to make purchases, a source of transportation, and even a means to attend college. While indications are that many college students manage their credit wisely, other students’ unwise and/or overuse of credit have led to financial and other problems.

Debt can impact students while they are in college, such as affecting concentration on their studies or having to reduce their course load in order to get a job (or increase work hours). Excessive debt may even lead to a student having to drop out of college.

Credit-related problems may continue after college. The combination of credit card, student loan, and other debts acquired during college, especially if coupled with unrealistic expectations about income and expenses after graduation, can impact the financial stability and security of college graduates for many years. Poor credit management may even impact employment opportunities, if potential employers check credit histories.

This exploratory study examined college students’ knowledge and use of credit. Unlike most other studies, this one focused on incoming freshmen, providing an opportunity to explore whether students incur debt prior to (or early in) their college career.

Use of Credit According to a Student Monitor survey conducted during spring 2000 and cited in a U.S. General Accounting Office (2001) report, some 63 percent of all college students had at least one credit card. Of those college students with credit cards, 42 percent did not pay their balances in full each month, carrying an average debt of $577. Joo, Grable, and Bagwell (2001) found that 70.7 percent of the college students in their study had one or more credit cards, with more than two-thirds (68.2%) getting their first credit card at age 18 or earlier. Just over half of these students (50.6%) usually did not pay their balances in full each month.

Tan (2003) reported a slightly higher percentage of students with at least one credit card (76.8%). Almost half (49.1%) of those students got their first credit card before entering college; an additional 42.8 percent got their first credit card by the end of their sophomore year. Sixty-three percent of the students with credit cards usually did not pay their balances in full each month, although 40 percent paid more than the minimum payment. Average credit card debt was similar among freshmen and sophomores ($2,077 and $2,089), as well as among seniors and graduate students ($3,559 and $3,628).

Similar results were reported in a Nellie Mae (2005) study of undergraduate applicants for their student loans. They found 76 percent of the students had credit cards, most of whom (56%) got their first one at the age of 18. Seventy-five percent of those with credit cards made payments of less than the outstanding

Electronic copy available at: http://ssrn.com/abstract=2248804

Financial Counseling and Planning, Volume 16 (2), 2005

balance on all their credit cards (although 44 percent paid more than the minimum payment on all their cards); another four percent relied on their parents to pay their credit card bills. Average credit card debt also varied by grade level, with freshmen carrying an average balance of $1,585 and final year students $2,864.

Even higher percentages of students with at least one credit card were reported by Hayhoe, Leach, and Turner (1999). Eighty percent of students in their study had one or more credit cards (including individually owned or jointly owned with a parent or spouse). Seventy-five percent of those with at least one credit card carried a balance on one or more of those cards. The researchers also examined predictors for those students with four or more credit cards (versus those with less than four credit cards). In addition to several credit attitude and money attitude variables, those students with four or more credit cards were more likely to be older and female, and less likely to borrow from friends or relatives when money was short. They also were more likely to have taken a personal finance course, prepare a list when shopping, and had money used as a reward in their family of origin.

A recent study by Hayhoe, Leach, Allen, and Edwards (2005) sought to confirm the findings of the earlier study by Hayhoe et al. (1999) and found that those students with four or more credit cards (versus those with less than four credit cards) were more likely to be older, white, in a higher year in school; have a student loan; and not have had a course in personal finance. They also were more likely to: score higher on the affective (emotional) credit attitude scale and retention money attitude (not wanting to spend money); score lower on the behavioral (actions) credit attitude scale; and have had fewer imagined interactions with parents. Unlike the earlier study – which included graduate and undergraduate students – this study included only undergraduates and was predominately freshmen (77%). Only 49 percent of the students reported having credit cards.

Credit card debt represented 16 percent of the total debt of students in the Tan (2003) study. The remaining debt included student loans (22%), auto loans (16%), mortgage loans (9%), bank loans (5%), and others (32%). Those students with higher debt levels tended to be older, married, upperclassmen, and those with higher incomes.

The 2002 National Student Loan Survey (Baum & O’Malley, 2003) reported an average student loan debt acquired for undergraduate studies of $18,900. However, while both undergraduate and graduate students indicated feeling burdened by their education

debt, over 70 percent agreed that student loans were very or extremely important in allowing them access to higher education. Graduating seniors who had applied for Nellie Mae student loans reported an average combined credit card and student loan debt of $20,402 (Nellie Mae, 2002).

Credit Knowledge Recent studies of credit knowledge among college students tend to focus on knowledge and understanding of the specifics of the student’s credit cards or other debt. For example, Joo, Grable, and Bagwell (2001) found that a significant number of college students in their study knew the Annual Percentage Rate (61.3%), late fee (54.9%), and annual fee (59.5%) for their major credit card. Fewer (39.9%) knew the cash advance fee, however. An exploratory study by Warwick and Mansfield (2000) found only 28.9 percent of students knew the interest rate on their credit card, while more than half knew their credit card limit (57%) and their current credit card balance (52.5%).

A few studies have examined general credit knowledge of college students (or perception of their credit knowledge). Perceived knowledge and understanding about credit card use was examined by Tan (2003), who noted that many of the college students in his study reported “moderate” or “extensive” knowledge (versus “little or none”) of the implications of misusing credit cards (90%), how much their debt will ultimately cost (87%), the implications of just making minimum payments (86%), and how to manage their credit card debt (83%). However, knowledge levels were much lower among those students who were having problems handling their debts (24% of the students), defined as those who only paid the minimum each month on their credit cards or who were behind on their payments.

Impact on Students Thirty-one percent of the students in the Tan (2003) study reported that credit card debt affected (moderately or extensively) their concentration on academic work, their involvement in extracurricular activities, and their decision to take fewer hours and get a job to pay off debt. Credit card debt also affected their decision to remain in school (28%) and their sense of priority about academic work (26%). The effects were even more prevalent among those students who only paid the minimum each month on their credit cards or who were behind on their payments. These students also were more likely to be older, married, and female; have a lower grade point average and lower personal income; and have more credit cards and higher debt levels.

Baek (2001) also found an association between credit practices and college students’ concentration on their studies. Paying only the minimum amount on credit

College Students’ Knowledge and Use of Credit

card debt, not paying credit card balances in full, and having student loan or credit card debt were among the significant predictor variables for higher levels of financial concerns (based on how many times in the last 12 months financial concerns kept the college students from concentrating on their studies).

Profiles of financially at-risk students were developed by Lyons (2004), including those who had credit card debt of $1,000 or more, were delinquent on their credit card payments by two months or more, had reached the limit on their credit cards, and did not pay off their credit card balances in full each month. Significant variables that increased the probability of having $1,000 or more in credit card debt (with marginal effects of 7% or more) included having other debt of $1,000 or more, being black, being married, and having acquired a credit card in the mail or at a retail store. Being financially independent, receiving financial aid, having other debt of $1,000 or more, being black, renting an apartment, working more than 16 hours a week, and having acquired a credit card in the mail, at a retail store, or at a campus table significantly increased the probability (by 7% or more) that students did not pay their credit card balances in full each month.

The impact of debt and the accumulation of debt extend beyond the college years. Sullivan, Thorne, and Warren (2001) analyzed bankruptcy data from the Administrative Office of the United States Courts and found that young adults (ages 25-34) made up 26 percent of bankruptcy petitioners in 2001 (including all petitioners, not just the “primary” debtors). This represented an estimated 11.7 per 1,000 of the adult population. Only the 35-44 age group had higher bankruptcy rates (33.7% of all petitioners or 13.3 per 1,000 of the adult population). The degree to which credit card, student loan, and other debts acquired during college contributed to bankruptcy filings by young adults was not studied, but previously cited studies indicated that some students already were having problems managing their debts while in college.

Methodology Sample Data were collected over a 3-day period from 216 incoming freshmen students in September, 2002. Students from five sections of a required orientation class for incoming freshmen in the College of Human Environmental Sciences at a southern university were surveyed during the beginning of the class period (approximately 15 minutes).

The students were informed of both the voluntary and confidential nature of the survey. Three surveys were returned blank (i.e., the students chose not to participate) and one survey was discarded due to age

(the student was under age 18). The remaining 216 surveys were utilized in the study, although missing data resulted in slightly smaller samples for regression analyses.

Variables Variables included demographic characteristics, access to and use of credit, and credit knowledge (see Table 1). Demographic variables were selected after a review of related research and included age, gender, marital status, race, and employment status. Age was maintained as a continuous variable. Other demographic characteristics were coded as dichotomous variables, including gender (female; male), marital status (single, never married; married,

Table 1 Measurement of Variables Used in Regression Variable Measurement

Age Age in years

Gender 1 = Female 0 = Male

Marital status 1 = Single, never married 0 = Married, divorced, or separated

Race 1 = White 0 = African-American, Native-American, Hispanic, Asian, or Other

Employment status

1 = Employed (part-time, full-time, or self- employed) 0 = Not-employed

Credit card in own name

1 = Has credit/charge card in own name (or with spouse, where both liable) 0 = Has no credit/charge card in own name (or with spouse, where both liable)

Other credit card

1 = Has other credit/charge card can use (such as in parent’s or guardian’s name) 0 = Has no other credit/charge card can use (such as in parent’s or guardian’s name)

Number of credit cards Total number of credit/charge cards

Credit card debt Total amount of credit/charge card debt (including bank credit cards, store credit/charge cards, gasoline charge cards, and others)

Other debt Total amount of other debt (including student loans, car/truck loans, cash loans, mortgages, and other non-credit/charge cards debt)

Total debt Total amount of debt (including credit/charge card debt and other debt)

Credit knowledge

Sum of correct responses to the six credit knowledge questions, calculated on a 100-point scale

Financial Counseling and Planning, Volume 16 (2), 2005

divorced, or separated), race (white; African American, native-American, Hispanic, Asian, or other), and employment status (employed part-time, employed full-time, or self-employed; not employed).

Access to credit included whether the student had a credit card or charge card in his or her own name (or with a spouse, where both were liable for the debt) and whether the student had other credit/charge cards he or she could use (such as a parent’s or guardian’s). Additional debt-related variables included the number of credit/charge cards (including bank credit cards, store credit/charge cards, gasoline charge cards, and others), amount of credit/charge card debt, amount of other debt (including car/truck loans, student loans, cash loans, mortgages, and other non-credit/charge card debt), and total debt (including credit/charge card debt and non-credit/charge card debt). In a few cases, where students indicated that they had a specific type of debt (such as a car loan or bank credit card), but failed to enter an amount, means for that specific type of debt were utilized in the data analyses.

The researcher originally had been asked to provide an educational program on credit for incoming freshmen students. Seven questions were developed to provide the basis for both the variable on credit knowledge and the educational program. They ranged from general questions about the advantages/disadvantages of credit and what a creditor can ask when determining “creditworthiness” to more specific questions about grace periods and how long non/late-payment information can be reported by Consumer Reporting Agencies. One question about maximum credit card liability for a stolen credit card was dropped due to comments noted by a few students (indicating the question was not clearly worded). The sum of correct responses to the remaining six questions, calculated on a 100-point scale, was utilized for the credit knowledge variable.

Analyses Because of the continuous nature of the dependent variables, multiple regression (OLS) was utilized to examine the predictive nature of the independent variables. Four equations utilized a debt variable as the dependent variable (amount of credit/charge card debt, amount of other debt, amount of total debt, and number of credit/charge cards). Independent variables for all four equations included age, gender, marital status, race, employment status, and credit knowledge.

Four equations utilized credit knowledge as the dependent variable. Demographic variables (age, gender, marital status, race, and employment status) were independent variables for all four equations. One equation included the demographic variables and two variables indicating access to a credit/charge card

(students had a credit/charge card in their own name and students had other credit/charge card they could use). Another equation included the demographic variables, credit/charge card debt, and other (non- credit/charge card) debt. The final equation included the demographic variables and total debt as independent variables.

Limitations Lack of time created some limitations for this study. Had time permitted, the researcher would have included additional credit knowledge questions, conducted a post-test, and included variables such as pre-college training or coursework in personal finance, attitudes toward credit and credit use, and several measures of income and financial independence. Further, because of the convenience nature of the sample – which contributed to limited diversity in several demographic variables – results are tentative and cannot be generalized beyond the scope of this study. Other study limitations are those associated with similar surveys, including willingness to provide debt information and accuracy of recall.

Results Descriptive Statistics Descriptive statistics for the demographic, credit use, and credit knowledge variables are provided in Table 2. The respondents were predominantly female (92.1%); single, never married (95.8%); and white (87.5%). Almost three-fourths of the students were 18 years old (74.1%); the oldest incoming freshman was 30 years of age. Most of the students (97.2%) were full-time students, with only 18.5 percent currently employed.

Just over half (50.9%) of the students had some type of debt, including credit/charge card debt and other (non- credit/charge card) debt. Forty-two percent of the students indicated that they had a credit/charge card in their own name (or jointly with a spouse, where both were liable for the debt), while more than a third (34.3%) indicated they had a credit/charge card they could use (such as a parent’s or guardian’s). Collectively, 62 percent of the students had access to a credit/charge card.

Among those students with credit/charge cards in their own name, the amount owed on these cards averaged $712 (including those with no outstanding balances). Almost two-thirds (65.6%) of these students had outstanding balances, however, averaging $1,086.

Almost a third of the students (31.8%) had non- credit/charge card debt, primarily student loans (24.3%) and car/truck loans (10.7%), that averaged $6,874. Total debt (among those students with some type of debt) averaged $4,876, ranging from $15 to $70,160.

College Students’ Knowledge and Use of Credit

Table 2 Descriptive Statistics

Incoming freshmen

(N = 216 unless other noted)

Percentage distribution Mean Median

Age 18.6

Gender Female Male

92.1

7.9

Marital status Single, never married Married Divorced Separated Missing

95.8

1.9 0.5 0.5 1.4

Race White African-American Native-American Hispanic Asian Other

87.5

1.4 6.5 0.9 2.8 0.9

Employment status Full-time student (>12 credits/semester) Part-time student (<12 credits/semester) Employed full-time (>35 hours/week) Employed part-time (<35 hours/week) Self-employed Homemaker Other

97.2

1.4 1.9

15.8 1.4 2.4 1.0

Has credit/charge card in own name or with spouse, where both liable 41.7 Number of credit/charge cards

(among those with credit/charge cards; n = 90) 1.8 1.0

Amount owed on credit/charge cards (among those with credit/charge cards; n = 90) $712.03 $150.00

Has outstanding balance on credit/charge cards (among those with credit/charge cards; n = 90) 65.6

Outstanding balance on credit/charge cards (among those with outstanding balance; n = 59) $1,086.15 $690.75

Has other credit/charge card can use, such as in parent’s or guardian’s name 34.3

Has access to credit/charge card (credit/charge card in own name or other credit/charge card can use) 62.0

Has other non-credit/charge card debt (n = 214) Student loans Car/truck loan Mortgage Cash loans Amount owned on other debt (among those with other debt; n = 68)

31.8 24.3 10.7

0.5 0.5

$6,873.87

$4,764.18

Total debt (among all students; n = 214) Total debt (among those with debt; n = 109)

$2,483.67

$4,876.20

$55.00

$2,400.00

Credit knowledge 56.1 50.0

Financial Counseling and Planning, Volume 16 (2), 2005

The students were asked a series of questions about credit knowledge, each with four multiple-choice answers. The lowest correct response rate (19.4%) was for a question about how long non- or late-payment information can be reported as part of a credit history. The highest correct response rate (82.9%) was for a question about the advantages and disadvantages of credit. Other questions dealt with what a potential creditor can and cannot ask about (81.0% answered correctly); establishing and/or reestablishing a good credit history (75.0% answered correctly); what a grace period is (32.9% answered correctly); and the recommended maximum percent of take-home income that individuals/families should commit to monthly credit payments, excluding mortgages (45.4% answered correctly). Total credit knowledge scores ranged from 0 to 100, with a mean of 56.

It appeared that the students correctly answered more of the broader, general questions and incorrectly answered more of the specific questions. To examine this more closely, the credit knowledge questions were divided into two groups based on their broad versus specific nature (three general questions and three specific questions). Each student was then graded on the two sets of credit knowledge questions (based on a 100-point scale). A paired sample t-test was used to examine the two sets of credit knowledge scores. Results indicated that the students scored significantly higher on the broader, general questions than they did on the more specific questions (t = 18.5, p < .001).

Regression Results Use of Credit The predictive nature of demographic variables (age, gender, marital status, race, and employment status) and credit knowledge on a) three measures of debt levels and b) the number of credit/charge cards the students held was explored (see Table 3). Age was the only significant predictor of credit/charge card debt (with older students having higher levels of debt than younger students), while age and race were significant predictors of the number of credit/charge cards held (older students had more credit/charge cards than younger students, while white students had fewer credit/charge cards than non-white students). Both age and marital status were associated with the amount of other (non-credit/charge card) debt and the amount of total debt. Older students had higher levels of both other debt and total debt than younger students, while single, never married students had lower levels of both other debt and total debt than currently/formerly married students.

Credit Knowledge The predictive nature of demographic variables on credit knowledge also was explored. Other equations included whether access to credit/charge cards or already having acquired debt were associated with credit knowledge. Table 4 provides these regression results.

For all four equations, gender and race were the only significant predictors of credit knowledge. Female students scored lower then male students, while white students scored higher than non-white students.

Age, marital status, and employment status were not significant predictors of credit knowledge. Nor were having access to credit/charge cards (either in their own name or another that they could use, such as in a parent’s or guardian’s name) or having acquired debt (credit/charge card debt and non-credit/charge card debt; or total debt)

Summary and Conclusions Many incoming freshmen at the College and University studied already had access to credit or had acquired debt. Sixty-two percent had their own credit/charge card or the use of one (such as their parent’s or guardian’s credit/charge card). Two-thirds of those who had their own credit/charge card had an outstanding balance on their card(s) and almost one- third of all the students had other (non-credit/charge card) debt. As might be anticipated, older students had more credit/charge cards, as well as higher levels of credit/charge card debt, other (non-credit/charge card) debt, and total debt, than younger students. White students tended to have fewer credit/charge cards than non-white students, while single, never married students had lower levels of both other (non- credit/charge card) debt and total debt than currently/formerly married students.

Freshmen students in this study knew little about credit, although they scored higher when answering more general credit knowledge questions – some of which were related to issues addressed by the media – than when answering more specific questions. Two demographic variables were significant predictors of credit knowledge, with female students consistently scoring lower than male students and white students consistently scoring higher than non-white students. Further study is needed to see if these and other reported relationships are consistent when utilizing a more diverse, representative sample of freshmen students.

College Students’ Knowledge and Use of Credit

Table 3 Standardized Regression Coefficients: Use of Credit

Equation 1 (N=213)

Equation 2 (N=211)

Equation 3 (N=211)

Equation 4 (N=213)

Dependent variable

Amount of credit/charge card

debt

Amount of other (non-credit/ charge card) debt

Amount of total debt

Number of credit/charge cards

Beta Beta Beta Beta Age Gender (Female) Marital status (Single) Race (White) Employment status (Employed) Credit knowledge

.405***

-.033 .072

-.020 .113 .020

.148* .040

-.294*** -.003 .101 .091

.208** .032

-.262*** -.006 .114 .088

.319***

-.032 .046

-.214*** .092

-.032

* p < .05 ** p < .01 *** p < .001 Table 4 Standardized Regression Coefficients: Credit Knowledge Equation 1

(N=213) Equation 2 (N=210)

Equation 3 (N=211)

Equation 4 (N=211)

Dependent variable Credit knowledge Credit knowledge Credit knowledge Credit knowledge Beta Beta Beta Beta Age Gender (Female) Marital status (Single) Race (White) Employment status (Employed)

-.041 -.155* -.132 .154* .030

-.039 -.160* -.130 .193** .033

-.052 -.159* -.101 .153* .014

-.060 -.158* -.105 .153* .012

Has credit card in own name Has access to other credit card

-.023 -.093

Credit/charge card debt Other (non-credit/charge card) debt

-.004 .100

Total debt .098

* p < .05 ** p < .01 *** p < .001 Interestingly, there was not a significant relationship between credit knowledge and use of credit. Students who had higher levels of debt – or who had access to credit/charge cards – were not significantly more or less knowledgeable about credit. Nor were students who were more knowledgeable about credit more or less likely to have higher debt levels (or have access to credit).

While access to credit can provide many advantages to college students, it also can create current and future financial problems if used unwisely. Credit education programs may facilitate better financial practices and counter the economic impact of credit mistakes on the individual, their families, businesses, and the economy.

Several major questions still need to be addressed. Who will provide this education? Is it the responsibility of parents, high schools, credit card

issuers, the university, community educators, financial counselors, or others? How comprehensive should this education be, given current time and other restraints? What efforts must be taken to insure that the educational program is accurate, current, and unbiased? What educational methods should be utilized – or perhaps what combination of face-to-face, web-based, print-based, and other educational methods – to best assure that students understand the educational information, and more importantly, utilize the information when making credit decisions? When would this education best be provided, or should credit education be addressed at several points in time? The findings from this study suggest that credit education may be needed early – before students enter college (or shortly thereafter). This may help students make informed decisions about credit use and avoid having excessive debt significantly affect their current and future financial security. It also may contribute to the students’ academic success while in college.

Financial Counseling and Planning, Volume 16 (2), 2005

References Baek, E. (2001). Financial concerns and problems of college

students. In J. M. Hogarth (Ed.), Proceedings of the Association for Financial Counseling and Planning Education (pp. 16-25).

Baum, S. & O’Malley, M. (2003, February). College on credit: How borrowers perceive their education debt. Retrieved June 2, 2005, from http://www.nelliemae.com/library/research.html

Hayhoe, C. R., Leach, L., & Turner, P. R. (1999). Discriminating the number of credit cards held by college students using credit and money attitudes. Journal of Economic Psychology, 20, 643-656. Retrieved May 25, 2005, from http://www.sciencedirect.com/science/journals/economics

Hayhoe, C. R., Leach, L., Allen, M. W., & Edwards, R. (2005). Credit cards held by college students. Financial Counseling and Planning, 16, 1-10.

Joo, S., Grable, J. E., & Bagwell, D. C. (2001). College students and credit cards. In J. M. Hogarth (Ed.), Proceedings of the Association for Financial Counseling and Planning Education (pp. 8-15).

Lyons, A. C. (2004). A profile of financially at-risk college students. The Journal of Consumer Affairs, 38, 56-80.

Nellie Mae. (2002, April). Undergraduate students and credit cards: An analysis of usage rates and trends. Retrieved May 20, 2004, from http://www.nelliemae.com/library/research.html

Nellie Mae. (2005, May). Undergraduate students and credit cards in 2004: An analysis of usage rates and trends. Retrieved June 2, 2005, from http://www.nelliemae.com/library/research.html

Sullivan, T. A., Thorne, D., & Warren, E. (2001, September). Young, old, and in between: Who files for bankruptcy? Norton Bankruptcy Law Adviser. Retrieved June 2, 2005, from http://www.law.harvard.edu/faculty/ewarren/works.php

Tan, D. L. (2003). Oklahoma college student credit card study. Norman, OK: University of Oklahoma, Center for Student Affairs Research. Retrieved May 20, 2004, from http://www.ou.edu/education/csar/

U.S. General Accounting Office. (2001, June). Consumer finance: College students and credit cards. (Publication No. GAO-01-773). Retrieved October 17, 2001, from http://www.gao.gov

Warwick, J., & Mansfield, P. (2000). Credit card consumers: College student’s knowledge and attitude, Journal of Consumer Marketing, 17, 617-626. Retrieved December 20, 2004, from http://thesius.emerald-library.com

Credit Usage of College Students: Evidence from the University of Illinois

April 2002 Angela C. Lyons Assistant Professor, Department of Agricultural and Consumer Economics University of Illinois at Urbana-Champaign Patricia M. Andersen The Office of Student Financial Aid University of Illinois at Urbana-Champaign

Contents Acknowledgements……………………………………………………………………………... 4 Introduction……………………………………………………………………………………... 5 Research Objectives…………………………………………………………………………….. 7 Survey Methodology…………………………………………………………………………….8 Credit Card Usage……………………………….…………………………………………….. 13 Atttitudes Toward Using Credit Cards…………………………………………………………22 Financial Practices of Students with Credit Cards……………………………………………..25 A Profile of At-Risk Students…………………………………………………………………. 32 Summary of Major Findings…………………………………………………………………... 42 Other Important Findings and Future Research……………………………………………….. 43 Recommendations for the University of Illinois and Beyond………………………………… 45 References……………………………………………………………………………………... 48 Appendix………………………………………………………………………………………. 51

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Tables and Figures Table 1: Demographics for the Entire Student Sample……..……………………………..11 Table 2: Demographics of Students With and Without Credit Cards……..……………… 12 Table 3: How Do Students Acquire Credit Cards?………………..……………………… 14 Table 4: What Entices Students to Get Credit Cards?………..……………….…………...15 Table 5: Percentage of Students at UIUC With at Least One Credit Card ………………..16 Table 6: Types of Credit Cards Students Hold ……………………………………………18 Table 7: What Do Students Purchase with Their Credit Cards?………………………….. 19 Table 8: The Advantages of Having a Credit Card……………………………………….. 21 Table 9: The Disadvantages of Having a Credit Card……………………………………. 22 Table 10A: Attitudes Towards Using Credit Cards: Percentage of students who believe it is all right to borrow money or use a credit card to pay for the following……. 23 Table 10B: Attitudes Towards Using Credit Cards (conti.): Percentage of students who agree with these statements………………………………………………… 24 Table 11: Financial Practices of Students Who Use Credit Cards…………………………. 26 Table 12: Financial Knowledge of Students With Credit Cards…………………………… 27 Table 13: Other Types of Borrowing by Students…………………………………………. 29 Table 14: Types of Financial Assistance Received…………………………………………30 Table 15: Credit Card Usage of Students With Credit Cards…..…………………………...30 Table 16: Other Types of Debt Held by Students with Credit Cards by Financial Aid Status…………………………………………………………………………….. 31 Table 17: Demographics of Students with Credit Card Debt of $1000 or More…………... 33 Table 18: Students with Credit Card Debt of $1000 or More & Their Financial Practices...34 Table 19: Students with Credit Card Debt of $1000 or More & Their Credit Card Usage…35 Table 20: Students with Credit Card Debt of $1000 or More & Other Borrowing………... 36 Table 21: Demographics of Students with Four or More Credit Cards……………………. 37 Table 22: Students with Four or More Credit Cards & Their Financial Practices………….38 Table 23: Students with Four or More Credit Cards & Their Credit Card Usage…………. 39 Table 24: Students with Four or More Credit Cards & Other Borrowing…………………. 39 Table 25: At-Risk Students Who Would Use the Following University Services………….41

Acknowledgements The Office of Student Financial Aid (OSFA) and the authors of this report would like to acknowledge a number of individuals who assisted in the design and implementation of the online survey on University of Illinois students and credit card usage. Without their valuable input, this research would not be possible. In particular, we would like to thank:

Orlo Austin, Director of the Office of Student Financial Aid; Tom Grayson, Assessment Program Coordinator, Office of Vice Chancellor for Student Affairs; Carla Barnwell, Research Compliance Coordinator for the Institutional Review Board; Virginia Buchanan, Staff Secretary for the Institutional Review Board; Greg Forbes and Jim Neilson, OSFA Systems Analysts; Mary Skinner, OSFA; Ryan Smith formerly of the OSFA; all the staff members and especially, the graduate student workers at OSFA.

The authors graciously acknowledge the assistance and support of these individuals and recognize that they are not responsible for any errors.

Introduction In recent years, we have seen dramatic growth in credit card usage among college students. Increases in the number of students holding credit cards and incurring credit card debt have generated concern that students are becoming overextended and unaware of the long-term consequences associated with severe indebtedness. When other debt is added to this, such as educational loans, the concern becomes even greater. If used responsibly, credit cards can provide a number of advantages to college students. Credit cards can be a convenient means of payment, a useful tool for learning financial responsibility, a resource in case of emergencies, a means to establishing a good credit history, and a way to gain greater access to credit in the future. However, if credit cards are mismanaged or misused, the disadvantages can result in severe financial consequences. The convenience of credit may tempt students to live beyond their means. Excessive credit card debt and late payments can damage a student’s credit rating and make it more difficult for them to obtain credit on down the road. In addition, students who are financially inexperienced may not understand the cumulative effect that interest rates can have on the amount of debt owed. Inexperience with credit and a lack of personal financial knowledge is likely to place some students at greater financial risk for having large, and perhaps unmanageable, debt burdens when they graduate. For those students who are receiving financial assistance in the form of need-based grants, federal loans for education, and/or federal work-study, there may be an added risk of future financial difficulty. Are students accruing more debt than they can handle? The results are mixed. Recent media reports seem to suggest that college students are accruing too much credit card debt. Unfortunately, these reports often focus on anecdotal horror stories about students who have incurred excessively large amounts of debt. The seriousness of student credit card usage has also been exaggerated by recent commentary from college officials and policymakers, who feel strongly that students should have more limited access to credit. For this reason, researchers have begun to question whether growing concerns over rising credit card debt levels are warranted. Out of heightened concern about rising debt levels, several recent studies have attempted to determine whether college students are in fact incurring excessive amounts of credit card debt (Armstrong and Craven, 1993; Baek, 2001; Gutter and Kim, 2001; Hayhoe, 2002; Hayhoe, Leach, and Turner, 1999; Joo, Grable, and Bagwell, 2001; The Education Resources Institute and the Institute for Higher Education Policy, 1998; and the U.S. General Accounting Office, 2001). These studies examine students’ use of credit including: credit card ownership, the amount of credit card debt incurred, the types of credit cards held, and students’ attitudes towards credit usage. In general, these studies find that while the majority of college students now have credit cards, they appear to be using credit cards responsibly and are not accumulating large amounts of debt. However, there are some college students who do have excessive amounts of debt and are at risk of not being able to repay their debts, either because of a lack of financial experience or a lack of funds.

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To summarize their key findings, • Approximately, 70% of college students have at least one credit card. • The vast majority obtain credit cards prior to college or during their freshman year. • 6-14% have four or more credit cards. • Over half repay their balances in full each month. • Only 14-16% report balances over $1000 and about 5% report balances over $3000. The findings seem to suggest that growing concerns over the rising debt levels of college students may be misplaced. However, with this said, it is important to point out the limitations of these studies: • First, these studies focus on the credit card behavior of undergraduate students and do not

examine credit card usage and attitudes towards credit of graduate students. Excluding graduate students may give a misrepresentation of credit card usage, especially on larger campuses.

• Second, and perhaps most importantly, these studies do not attempt to identify and

characterize students who are at financial risk. While the majority of students do appear to use credit cards responsibly, there are students who carry several credit cards and large credit card balances. Who are these students, and how can they be helped?

• Third, these studies do not take into consideration the relationship between financial

assistance, other types of borrowing such as for a house or car, and credit card debt. It may be the case that current levels of financial assistance are not enough to cover the rising costs of college. Thus, those students most in need of financial assistance may be forced to turn to other forms of borrowing to complete their college degree.

• This brings us to our fourth limitation--there may be some groups on college campuses

that may be more at risk than others for experiencing financial strain (i.e. women and minorities.) Unfortunately, current research has not clearly identified these groups, and they may have a need for specific financial education programs to ensure that they are not at a financial disadvantage and are able to make informed financial decisions.

• The fifth, and final limitation, is that recent studies have not identified the personal

financial topics most needed by college students who are at financial risk. They also have not identified the most effective modes of delivery for this type of financial education.

Aside from these limitations, previous studies do provide substantia l insight into the usage of credit cards by college students. Are students incurring too much credit card debt and/or other

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debt? Who are the students most at risk? How can college campuses help at risk students better manage their finances while in school so that when they graduate they are able to repay their debts? What can the University of Illinois, or the Office of Student Financial Aid, do to offer the appropriate kinds of help? These are the issues that concern the Office of Student Financial Aid at the University of Illinois at Urbana-Champaign, and these are the issues we address in this report. Research Objectives In the Fall of 2001, the Office of Student Financial Aid (OSFA) conducted a survey of credit card usage among college students at the University of Illinois. The purpose of this report is to analyze the survey findings. Specifically, the main objectives are to: • Provide a detailed description of credit card usage and financial practices of college students at the University of Illinois; • Describe students’ attitudes towards using credit; • Compare the credit card behavior and attitudes towards using credit of undergraduate and graduate students; • Develop an understanding of the relationship between credit card debt, financial aid, and other types of borrowing; • Identify and characterize those students who are most at risk for experiencing future financial problems. The college years are a time of transition from financial dependence to financial independence. While most students come to college with an academic plan in mind, few come with a financial plan. The financial knowledge and practices students develop during their college years affect their future financial well-being. Research indicates tha t formal financial education plays an important role in reducing the financial management problems of college students. Those who learn financial management skills at a younger age tend to do better financially than those who do not receive financial education (Baek, 2001; Weston, 2001; Varcoe et al, 2001; Doll, 2000; Pilcher and Haines, 2000). For this reason, another objective of this study is to: • Identify resources and services that the OSFA and other campus and community organizations can offer students to help them better manage their credit card debt and other finances.

The ultimate goal is to make recommendations on the resources and services most appropriate for students both at the University of Illinois as well as other colleges and universities. The next section describes the survey methodology and characterizes the student sample. The remaining sections provide detailed analysis of student credit card behavior, financial practices and attitudes towards credit usage. A description of the students who are financially at risk and recommendations about campus services that could help those most at risk are included at the end. Survey Methodology As previously mentioned, the Office of Student Financial Aid (OSFA) conducted a survey in the Fall of 2001 to obtain feedback regarding student experiences in using credit cards and the thoughts and concerns students have about credit card debt. OSFA was looking for ways to better help students to manage their finances, especially their credit card debt. They were also looking to identify students at financial risk so they could improve and/or add to their financial aid services. The survey itself was an online survey that was designed using a software program called Infopoll Designer©.1 The survey was divided into four sections: Your Credit Card Experiences, Your Spending Habits, What Do You Think, and About You. There were 54 survey questions, several of which had multiple parts. To comply with the guidelines of the Institute of Huma n Subjects at the University of Illinois, the OSFA completed a special permission form explaining the intent of the survey. Because of the sensitive nature of some of the questions on the survey, extra precautions were taken to insure no personal information would be connected with student names or e- mail addresses. A short-cut page was developed to display the survey’s web address. When a student finished filling out the survey, they were directed to another short-cut page that was connected to a separate database, specifically developed to store the names of those who wished to enter an optional prize drawing. A random sample of 2,650 students, or approximately 7.0% of the total student population (37,767 students), was selected from the UI Direct database.2 The sample included undergraduate, graduate and professional students regardless of whether or not they were receiving financial assistance. Once the survey was published to the web, an e- mail message

1 A unique feature of this software program is that it offers the option to view the data in real time. In addition, raw data is saved online and can be viewed in charts and graphs at any time even after removing the survey from the web. A disadvantage to using this type of online survey is that participants can skip questions or sections, thus the number of actual answers to each question varies and, of course, all survey information was self-reported. 2 “Highlights” by Ruth A. Vedvik, Director of Admissions and Records, September 18, 2001.

with a formal description of the survey and a link to the short-cut page was sent to this random sample. The survey went online at the beginning of November. At intervals, between November 9th and December 9th, 2001, the OSFA sent out a total of four mass e- mails to the sample group. (See the Append ix for a description of the survey response rates over this period.) As an added incentive for filling out the survey, students who completed the survey were directed to another web address, where they were given the option to participate in a prize drawing for a $150 book voucher. Five vouchers were awarded, the winners being randomly selected from the pool of students who submitted their names to participate in the drawing. On December 9th, the survey was closed and the link to the website was removed. The response rate for the survey was approximately 34.0%, or 915 student responses. Of the 915 students who responded to the survey, only 835 were valid responses. 80 student observations had to be dropped, primarily due to missing information. Some of these observations were also removed because a few students had either submitted their completed survey information twice or submitted blank surveys. Survey Limitations Our description of the survey methodology would not be complete without a discussion of some of the survey’s limitations. Most of the limitations result directly from the fact that students were notified via e-mail and the survey was conducted online.

• For example, while every student at the University of Illinois at Urbana- Champaign has an e- mail account, they may not check or use their e-mail regularly. Also, every student at the University has access to the Internet, but they may not have their own personal computer or may not have had the time to fill out the survey for one reason or another.

• Another limitation is that anyone who knew the web address of the survey,

regardless of whether or not they were in the random sample, could submit the survey. This could enable anyone to corrupt the data. For example, participants could technically respond as many times as they wanted to the survey. We could have provided each prospective participant with an ID and password. However, given the sensitive nature of the survey topics and the guidelines set by the UIUC Institutional Re view Board, the OSFA decided that no identifying elements would be used.

• This brings us to our third limitation. Since the survey dealt with sensitive issues

concerning personal money matters, some students may have felt uncomfortable

answering the survey and chose not to participate. Some may have also been concerned about whether or not the data would in fact be kept confidential. These factors along with the recent increase in the number of online surveys may have affected the student response rate.

• In addition, the timing of when the electronic survey was administered may have

also resulted in a lower response rate. One of the four mass e-mails was sent to students just before Thanksgiving. Many students had already left campus and would not return until after break. Another e- mail was sent the last week of classes, the busiest time of the semester for most students.

• Finally, it is important to note that all of the survey questions were self-reported

which could have resulted in the mis-reporting or under-reporting of credit card usage and other money management inquiries. In other words, the “actual” credit card usage, financial practices and behavior of students may be different than what they reported. Due to perhaps societal pressures or standards, some students may have reported what they believed to be was the “correct” answer rather than what actually was the correct answer. Also, some questions on the survey were very long and had multiple-choice answers. This may have created some confusion on the students' part if they did not take the time to read the questions thoroughly.

Overall, regardless of these limitations, the results from the survey provide significant insight into the credit card behavior, financial practices and attitudes of college students at the University of Illinois at Urbana-Champaign. Student Demographics Table 1 gives a descriptive overview of the 835 students who make up our working sample. Undergraduates comprise 73.4% of the sample. In addition, according to Table 1, 54.5% are female and 89.3% are single. With respect to ethnicity, 69.9% are white, 15.2% are Asian, 5.3% are black, and 5.1 % are Hispanic. 33.1% report being financially independent, and 44.0% report that they receive some form of financial aid, where financial aid includes need-based grants, financial aid loans, and/or federal work-study. With regards to employment, 44.3% of students report working and 23.0% report working 16 or more hours per week.

Table 1: Demographics for the Entire Student Sample (N=835)

54.5 45.5

89.3 69.9

5.3 15.2

5.1

33.1 44.3

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Table 2 focuses on the demographic differences between those with and without credit cards. Of the 835 students who comprise our sample, 446 are undergraduates who hold at least one credit card (53.4%), 212 are graduate students who hold at least one card (25.4%), and 177 are undergraduate and graduate students who hold no credit cards (21.2%). Out of the 177 students who report holding no credit cards, only 10 are graduate students. As Table 2 shows, students with credit cards are less likely to be female, black, and Hispanic and more likely to be male and white than those with no credit cards. These findings may be capturing the possibility that women and minorities have unequal access to credit.

• 54.3% of the undergraduates and 50.9% of the graduate students with credit cards are female, while a larger percentage of the students with no credit cards, 59.3%, are female.

• 5.6% of the undergraduates with credit cards are black and 4.0% are Hispanic.

2.8% of the graduate students with credit cards are black and 5.7% are Hispanic. Of the students with no credit cards, 7.3% are black and 7.3% are Hispanic.

• 4.0% of undergraduates and 5.7% of graduate students with credit cards are

Hispanic compared to a slightly larger percentage, 7.3%, of students with no credit cards.

• Interestingly, a higher percentage of students with credit cards are Asian. 14.3% of undergraduates and 21.7% of graduate students with credit cards are Asian. Only 9.6% of students with no credit cards are Asian.

TABLE 2: Demographics of Students With and Without Credit Cards (percentages)

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(446) Undergrads w/ ccs 54.3 45.7 98 72.4 5.6 14.3 4 14.8 49.6 11.2 48.9

(212) Grad Students w/ccs 50.9 49.1 63.2 62.7 2.8 21.7 5.7 84.9 88.8 59 30.7

(177) All students w/No ccs 59.3 40.7 98.9 72.3 7.3 9.6 7.3 16.9 40.1 9.6 47.5

Female Male Single White Black Asian Hispan Indepen

dent Working

Workg 16+ hrs

FinAid

In addition to differences in gender and ethnicity, undergraduates with credit cards are less likely to be financially independent than those with no credit cards. Not surprisingly, graduate students are more likely to be financially independent.

• 14.8% of undergraduates with credit cards and 16.9% of students with no credit cards are financially independent compared to 84.9% of graduate students with credit cards.

With respect to employment, graduate students with at least one credit card are more likely to be working and the majority of these students are more likely to be working 16 or more hours per week.

• 88.8% of graduate students with credit cards are working while only 49.6% of undergraduates with credit cards and 40.1% of students with no credit cards report working.

• Not surprisingly, 59.0% of graduate students with credit cards are working 16 or more hours per week and is likely due to the fact that graduate assistantships are typically 20 hours per week. 11.2% of undergraduates with credit cards are working at least 16 hours, slightly higher than 9.6% for students without credit cards.

Finally, with regards to financial aid, graduate students are less likely to be receiving financial aid than undergraduates with credit cards and students with no credit cards.

• 30.7% of graduate students with credit cards receive need-based financial aid compared to 48.9% of undergraduates with credit cards and 47.5% of students with no credit cards.

This last finding sho uld not be surprising since financial aid is comprised of need-based grants, financial aid loans, and/or federal work-study and most graduate students depend on assistantships for financial support.

Credit Card Usage There has been growing concern among some college and university administrators that the aggressive marketing of credit card companies on college campuses has substantially contributed to the recent rise in credit card debt on college campuses (The Education Resources Institute and The Institute for Higher Education Institution, 1998). A recent study by the U.S. General Accounting Office showed that 21-24% of students obtained credit cards by completing applications at campus tables. Another study conducted at Purdue University showed that 61% of students reported getting credit cards through campus vendors (Riggle, 2001). At the University of Iowa, researchers found that the “number one reason for the spreading problem of credit card debt among college-aged students is availability” (Brown, 2001). The University of Iowa and several other colleges and universities have limited credit card solicitation on campus. Our study shows that at the University of Illinois 11.2% of undergraduate students and 25.0% of graduate students acquired a credit card at a campus table. See Table 3.

TABLE 3: How Do Students Acquire Credit Cards? (percentages)

100

Undergraduate w/cc (N=446) Grad Studnt w/cc (N=212)

Undergraduate w/cc (N=446)

55.8 25.6 11.2 23.1 7.6 8.1

Grad Studnt w/cc (N=212) 61.8 29.2 25 30.7 5.7 1.4

Mail Financial Institution

Campus Table

Retail Store

Phone Online

According to Table 3, filling out applications received in the mail is another popular way students acquire credit cards. This could be because credit card companies have been able to access lists of high school students and are able to send out mailings even before a student gets to college. Of the 658 students who have credit cards at the University of Illinois, 55.8% of undergraduate students and 61% of graduate students acquired them by filling out applications they received in the mail. This is a much higher percentage than reported by the U.S. General Accounting Office, where only 36-37% of surveyed students acquired cards by mail. Other ways University of Illinois students acquire credit cards:

• 25.6% of undergraduate students obtained credit cards through their financial institution, and 23.1% acquired them at a retail store (i.e. Gap, Sears, etc.).

• A higher percentage of graduate students than undergraduates received their cards at

retail stores and financial institutions. More specifically, 29.2% of graduate students obtained credit cards at a retail store and 30.7% from a financial institution.

• Less than 10% of both undergraduate and graduate students filled out applications over

the phone, 7.6% and 5.7%, respectively. In addition, undergraduates were more likely than graduate students to apply for credit cards online. 8.1% of undergraduates acquired a credit card online compared to only 1.4% of graduate students.

What entices students to get credit cards? The OSFA asked students on its survey, “What prompted you the MOST to sign up for a credit card?” This was a multiple-choice question and students could choose more than one answer and/or write in their own answer. See Table 4.

58.5 65.1

58.160.4 56.1 45.3 43.5

66.5

27.8 34

2.2 1 0

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TABLE 4: What Entices Students to Get Credit Cards?

(percentages)

Undergraduates Grad Students

Note: Percentages do not sum to 100 percent since students could check all the factors that affected their decision to sign up for a credit card. Results from the OSFA survey indicate that:

• Undergraduate students reported convenience as the most important factor in their decision to get a credit card (58.5%).

• Other influences for undergraduate students were to build a credit history (58.1%), for

emergencies (56.1%), and low cost or no costs (43.5%). • Graduate students reported that low cost or no cost for a credit card was the most

important factor influencing them to get a credit card (66.5%).

• Graduate students were also heavily influenced by convenience (65.1%), to build a credit history (60.4%), for emergencies (45.3%), then free gifts or discount coupons (27.8%).

• Neither undergraduate nor graduate students cited peer pressure as having a significant

affect on their decision to get a credit card. These findings are consistent with other studies that cite the top reasons for needing a credit card to be for emergencies, convenience, and to establish a credit history (The Education Resources Institute and The Institute for Higher Education Policy, 1998 and Joo, 2001). How many students have credit cards? Recent studies indicate that the majority of college students have at least one credit card. According to the U.S. General Accounting Office (2001), one third of all student respondents stated that they acquired a credit card before they started college. Another 46% obtained a credit card in their first year of college. In yet another report on students and credit cards, Joo (2001) finds that 70% of those surveyed had credit cards and most received them as early as age fifteen and 55% got the ir first credit card during the first year of college. Table 5 shows the percentage of college students at the University of Illinois who have at least one credit card.

TABLE 5: Percentage of Students at UIUC With at Least One Credit Card

78.8 72.8 95.5

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78.8% of all student respondents have at least one credit card. Of the graduate students, 95.5% have at least one credit card compared to 72.8% of undergraduate students. This finding is consistent with the findings reported by the Education Resources Institute and The Institute for Higher Education Policy showing that graduate students are more likely than undergraduates to have credit cards and more of them. The U.S. General Accounting Office (2001) reports that on average college students hold three credit cards. Another recent study (Blaum, 2000) reveals that the average number of credit cards held by college students is 2.7. According to the results from the OSFA survey, the average number of credit cards held by students at the University of Illinois is 2.4, clearly in the range of other research studies. The results also reveal that there are some students at the University of Illinois who have as many as four or more credit cards. High numbers of credit cards may certainly increase students’ spending power, however it may also increase their risk of having financial difficulties down the road. It is important to point out that credit card ownership does not necessarily imply that students will spend more or be more likely to use them irresponsibly. Blaum (2000) compares the number of cards owned by students with high materialism scores and those with low materialism scores and finds no significant differences. According to Blaum (2000), “card ownership per se does not point to a materialistic or consumerist mindset.” A detailed discussion of students at the University of Illinois who may be at financial risk can be found in the section entitled, “A Profile of At-Risk Students.” What types of credit cards do students hold? Before presenting the findings on the types of credit cards held by students, it is important to point out that some students at the University of Illinois appear to lack a clear understanding of key financial terminology. The types of credit cards students could report holding included: Visa, MasterCard, Discover, American Express, gas card (i.e. Shell, Amoco, etc.), retail card (i.e. Gap, Sears, etc.) and other, where students could type in the names of other credit cards not listed in the survey. One of the most common responses in the ‘other’ category was debit card, suggesting that students may not be aware of the differences between a credit card and a debit card. In addition, even though examples of retail cards were listed on the survey, students still seem to be confused about what a retail card is. For example, some students did not select retail card from the list, yet added the name of a retail store such as Lane Bryant in the “other” category. Nevertheless, a substantial number of students, about 30.0% of all undergraduate and graduate students, reported ha ving at least one retail credit card. There was also some confusion about what a credit card from a financial institution is. The confusion was perhaps due to the fact that banks sometimes issue a check card designed with a Visa logo on the front. The bank card works like a debit card instead of a credit card, withdrawing funds directly from your bank account. Some students added “fleet card” which may indicate a check card they acquired from a brand name credit card company, which is a check card, not a credit card. The confusion may also be due to the fact that students do not

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usually refer to their bank as a financial institution. Thus, student responses may be due not to a lack of financial knowledge, but to confusion over the wording of the survey question itself. Table 6 shows the types of credit cards University of Illinois students hold. Since survey participants could choose more than one answer about the types of cards they hold, percentages reported for each type of card do not sum to 100 percent. Some students have one card, and some have multiple cards. Also, keep in mind that the specific types of credit cards held may be directly related to the specific credit card companies targeting teenagers and college students (The Power of Plastic, 2001). Credit card companies target campuses because of research that shows students develop card brand loyalty at this age (Jump$tart Coalition, 2002).

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TABLE 6: Types of Credit Cards Students Hold (Total Survey Respondents N=835)

Undergrads w/cc N=446 70.6 46.4 23.5 9 5.4 29.4

Grad Students w/cc N=212 72.2 67.5 34 16 7.1 32.1

Visa MastrCard Discover AmExpress Gas Card Retail Store

• Not surprisingly, Visa and MasterCard are the two major credit cards held by college students at the University of Illinois.

• Visa cards are held by over 70.0% of all undergraduate and graduate students. • MasterCards are popular with 46.4% of undergraduates and 67.5% of graduate students. • About 30.0% of all students report having at least one retail credit card

• Less than 10.0% of all students report having a gas card. • 16.0% of graduate students and only 9.0% of undergraduates have an American Express

card.

What do students purchase with their credit cards? According to the U.S. General Accounting Office (2001), students use credit cards to purchase books and supplies, food, clothing, and entertainment. Students at some colleges also use their credit cards to pay for tuition fees. However, currently at the Unive rsity of Illinois, students do not have the option to use their credit cards to pay for tuition or fees. Also, some students, who rely on financial aid, charge more of their general living expenses while they are waiting for their funds to be disbursed. This practice is especially common among graduate students, those carrying higher than average balances, and those having four or more credit cards (The Education Resources Institute and The Institute for Higher Education Policy, 1998). A recent report by Blaum (2000) showed that students at Penn State do not use credit cards to “spend on luxuries or ‘extras,’ but necessities like computers, backpacks, designer jeans, high priced sneakers, etc.” This statement clearly suggests that today’s college student s may have a very different view of what items are necessary compared to their parents or older generations viewpoints. The ease with which credit cards can be used today clearly influences students’ spending behaviors. “Students today have more opportunities for making credit purchases to a far greater degree than any other generation of college students” (Blaum, 2000). Table 7 shows that the most common items purchased with credit cards by college students at the University of Illinois are: books and supplies, clothing, groceries, personal items, eating out, entertainment, and gas and travel.

TABLE 7: What Do Students Purchase With Their Credit Cards? (percentages)

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Undergrad Students (N=446) 75.4 72.9 54.4 43.9 48.7 36.8 61 5.4 3.1

Grad Students (N=212) 73.6 75.9 54.7 39.6 68.4 48.6 70.8 10.4 2.8

Bks/Suppl Clothing Groceries Personal Eating Entertain Gas/Trav Utilities Rent

• Roughly three-fourths of all undergraduate and graduate students use credit cards to purchase books and supplies and clothing.

• 61.0% of undergraduates use credit cards for gas and travel compared to 70.8% of

graduate students. This may be due to the fact that graduate students are more likely to have a car and thus more likely to spend money on gas and travel.

• Over half of all undergraduate students and graduate students use credit cards to purchase

groceries, while 68.4% of graduate students use them for eating out compared to 48.7% of undergraduates. This may be explained by the fact that more undergraduates living in dormitories may have a food plan, decreasing their need to eat out. A smaller percentage of undergraduates than graduate students use their credit cards for entertainment, 36.8% and 48.6%, respectively.

• As far as rent is concerned, about 3.0% of undergraduate and graduate students use credit

cards to pay their rent. Utilities is another area for less credit card usage by all students, as evidenced by the fact that less than 6.0% of undergraduates and about 10.0% of graduate students pay for these services with credit. These findings are not surprising since most apartment owners and utility companies only accept cash or check as payment.

• Approximately the same percentage of undergraduate and graduate students use their

credit cards to purchase personal items, 43.9% and 39.6%, respectively. What are the advantages and disadvantages of having a credit card? If used responsibly, credit cards offer several clear advantages to students. The U.S. General Accounting Office (2001) lists convenience, emerge ncy use, plane tickets home, establishing a credit history and cashless transactions as some of the benefits of holding credit cards. The majority of students at the University of Illinois concur with the U.S. General Accounting Office about the top three advantages of having a credit card: for emergencies, for convenience, and to build a credit history. See Table 8. Several students also indicated that financial independence and being able to postpone payments were advantages of having a credit card. More undergraduate students (28.7%) than graduate students (19.3%) believe that having a credit card gives them a feeling of independence. In addition, 28.9% of undergraduates and 24.5% of graduate students report that they believe it is an advantage to be able to buy now and pay later.

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TABLE 8: The Advantages of Having a Credit Card (percentages)

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Undergrad Students N=446 78.3 94.2 28.9 28.7 76

Grad Students N=212 81.1 86.8 24.5 19.3 64.6

Convenience Emergency

Use Buy Now Pay Later

Independence Build Credit

Note: What entices a college student to get a credit card and what is perceived as an advantage of owning a credit card is often the same thing. Students also had the option of writing in what they thought were the advantages associated with having a credit card. Write- in responses were often related to being able to purchase items online. Student responses included, but were not limited to: “You can order items from the Internet and catalogues;” “Ability to purchase items online and through mail order;” “Internet secure purchases.” Other write- in answers had to do with the ease and convenience of credit cards such as: “I withdraw money anytime and also from any place where the facility (cash station) is available;” “Easier and faster than money. Don’t have to worry about change. Just sign and go;” “foreign travel/good exchange rates.” “It helps to meet the necessities when there are no other resources to turn to. Parking is $120 per month!” The biggest disadvantage of having a credit card that was cited by both undergraduate (82.7%) and graduate students (67.0%) was the temptation to overspend. Write-in answers included many variations on this same theme: “It’s too easy to use and ove rspend;” “People get over their head in debt and credit card companies encourage this type of behavior;” “[It’s] Too easy to justify emergency needs for cash;” “You get carried away; spend money you don’t have;” “Sometimes [you] forget how much has already been charged on the card.” See Table 9. 38.6% of undergraduates and 34.9% of graduate students believe that it is a disadvantage to be able to put off payments until later.3 Other disadvantages had to do with the high cost of using credit cards and the responsibility associated with repaying credit card debt. 56.1% of undergraduates and 59.9% of graduate students responded that high interest rates are a disadvantage of having a credit card suggesting that students are well aware of the high costs

3 Recall that nearly 30% of students cited being able to buy now and pay later as an advantage. Depending on whether credit cards are used responsibly, delayed payment can be seen as either a disadvantage or advantage.

Anshul

Highlight

associated with credit card debt. Almost 45% of undergraduate students felt that being held responsible for the credit card bill was a disadvantage of credit cards.

TABLE 9: The Disadvantages of Having a Credit Card (percentages)

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Undergrad Students N=446 56.1 82.7 44.8 38.6

Grad Students N=212 59.9 67 17.9 34.9

High Interest Rates

Tempted to Overspend

Responsible for Bill Can Put off Payments

Attitudes Towards Using Credit Cards Students were also asked about their attitudes towards credit usage. Table 10A shows the percentage of students with and without credit cards who believe it is all right to borrow money or use a credit card to pay for the following: spring break or other vacations, a car or to make car payments, educational expenses, entertainment, and/or shopping. Several points are worth noting:

• Regardless of whether they hold a credit card, the majority of students strongly agree that it is all right to borrow money or use a credit card for educational expenses (between 83.0% and 90.0%).

• A higher percentage of students with credit cards than without credit cards believe

it is all right, in general, to make purchases using credit. Specifically, a significantly higher percentage of students with credit cards than those without

believe it is all right to borrow money or use a credit card for spring break or other vacations, for entertainment, and/or for shopping.

• Somewhat surprisingly, more students without credit cards believe it is all right to

use credit to buy a car or make payments on a car than those with credit cards. However, it may be the case that those without credit cards are more likely to purchase a car and make car payments.

TABLE 10A: Attitudes Towards Using Credit Cards Percentage of Students Who Believe it is All Right to Borrow Money or

Use a Credit Card to Pay for the Following

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Undergraduate Students 40.4 44.8 89.9 52.7 52.2

Graduate Students 37.3 33.5 83.5 47.2 50

Students With No Credit Cards 25.4 53.7 84.2 25.4 33.9

Spring Break/ Vacations

Buy a Car/Car Payments

Educational Expenses

Entertainment Shopping

Table 10B shows the percentage of students who agree with the following statements: credit card companies should not be allowed to set up tables on college campuses; credit card debt causes emotional and/or financial stress; having a large amount of credit card debt causes college students to quit school prior to graduation; debt counseling should be offered to college students during the school year: and college students should not have a credit card unless they have a job or income to support it.

TABLE 10B: Attitudes Towards Using Credit Cards (conti.)

Percentage of Students Who Agree With These Statements

42.9 37.9

78.7

27.8

72.4

4835.8

77.8

29.7

76.9

57.5

36.2

82.5

69.5 72.3

100

Credit card companies should not be allowed

on campus

Credit card debt causes emotional

and/or financial stress

Having large amount of credit card debt causes students to quit school

Debt counseling should be offered to students

Should not have a credit card unless you have a job or income

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Undergraduate Students N=446 Graduate Students N=212 Students /No Credit Cards N=177

Again, several findings are of particular interest:

• Regardless of whether they hold a credit card, more than 70.0% of students agree that credit card debt causes emotional and/or financial stress and that debt counseling should be offered to college students.

• Slightly over a third of all students agree that credit card companies should not be

allowed to set up tables on college campuses.

• A smaller percentage of undergraduate and graduate students with credit cards (27.8% and 29.7%, respectively) believe that having a large amount of credit card debt causes students to quit school prior to graduation. This is compared to 42.9% for students holding no credit cards.

• Finally, a significantly higher percentage of students without credit cards (72.3%)

agree that students should not have a credit card unless they have a job or income

to support it. Only 48.0% of undergraduates and 57.5% of graduate students with credit cards agree that students should not have a credit card unless they have income to support it.

Financial Practices of Students with Credit Cards The previous sections provide a general overview of credit card usage and attitudes about credit cards on the University of Illinois campus. This section describes and compares in more detail the financial practices of students who use credit cards. The results from Table 11 indicate the following for undergraduates who use credit cards: • 15.0% of undergraduates with credit cards have four or more cards.

• 13.7% owe $1000 or more in credit card debt, and 4.9% owe $3000 or more. • Over half of undergraduates with credit cards pay their balances in full each

month (67.3%). • 18.6% “max out” their credit cards almost every month, and 9.2% have been late

on their credit card payments by two months or more. • 24.2% have been rejected or turned down by a credit card company. • Of those undergraduates holding credit cards, 48.9% receive some type of

financial assistance, where financial assistance includes need-based grants, financial aid loans, and/or federal work-study.

Interestingly, all of these results are consistent with previous studies that focus on the credit card behavior of undergraduate students.4 These studies find that:

• Between 6.0 and 14.0% have four or more credit cards (15.0% for University of Illinois students.)

• Over half repay their balances in full each month (67.3% for University of Illinois students.)

• Between 14.0 and 16.0% report balances over $1000 and about 5.0% report balances over $3000 (13.7 and 4.9%, respectively, for students at the University of Illinois.)

4 For more details, s ee Armstrong and Craven, 1993; Baek, 2001; Gutter and Kim, 2001; Hayhoe, 2002; Hayhoe, Leach, and Turner, 1999; Joo, Grable, and Bagwell, 2001; The Education Resources Institute and the Institute for Higher Education Policy, 1998; and the U.S. General Accounting Office, 2001.

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TABLE 11: Financial Practices of Students Who Use Credit Cards

Undergraduates 15 13.7 4.9 67.3 18.6 9.2 24.2 48.9

Grad Students 28.8 32.5 18.4 50 20.8 9.9 40.1 30.7

4+ Cards Owe

$1000+ Owe

$3000+ Pay

Balance Max Out Cards

Late Payments

Were Rejected

w/FinAid

Overall, the financial practices of undergraduates who use credit cards at the University of Illinois seems to be very similar to other college campuses around the country. Unfortunately, past studies have not examined in detail the credit card usage of graduate students so we are unable to compare our findings for graduate students with those from other college campuses. Compared to undergraduates, graduate students are more likely to hold four or more credit cards, to owe $1000 or more, and to owe $3000 or more. .

• 28.8% of graduate students with credit cards hold four or more cards compared to 15.0% for undergraduates.

• 32.5% and 18.4% of graduate students owe $1000 or more and $3000 or more, respectively. Only 13.7% of undergraduates owe $1000 or more in credit card debt, and 4.9% owe $3000 or more.

Given that graduate students tend to have larger debt burdens than undergraduates, it should not be surprising that they are less likely to pay their balances in full each month and more likely to max out their credit cards, make late payments, and be turned down for credit cards. These latter findings raise concerns that graduate students at the University of Illinois may be at greater

financial risk than undergraduates. However, it is important to keep in mind that graduate students are likely to have higher expected incomes when they graduate than undergraduates. Thus, they are likely to be in a better financial position to repay their balances. However, this does not explain why graduate students are more likely than undergraduates to max out their credit cards and make late payments. Table 12 examines the level of financial knowledge of students with credit cards. It is interesting to note that while graduate students may have larger debt burdens than undergraduates, they are more likely to budget their money every month. 75.0% of graduate students report that they are likely to budget their money every month compared to 68.6% of undergraduates.

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TABLE 12: Financial Knowledge of Students with Credit Cards

Undergraduates 68.6 3.1 32.1 8.1

Grad Students 75 1.4 21.1 1.4

Budget Monthly

Don't Know Balance

Don't Know APR

Don't Know Limits

Graduate students are also more likely than undergraduates to know their credit card balance, annual percentage rate (APR), and credit card limit.

• 1.4% of graduate students and 3.1% of undergraduates do not know their credit card balance.

• A substantially large percentage of graduate students do not know what their annual percentage rate is, 21.1%. This percentage is even larger for undergraduates, 32.1%.

• Finally, 1.4% of graduate students do not know their credit card limit compared to 8.1% of undergraduates.

Overall, Table 12 presents some evidence to support the need for additional financial education on campus, especially for undergraduates with respect to budgeting. However, in general, most students at the University of Illinois know what their current credit card balance is as well as the annual percentage rate and borrowing limit. Other Types of Borrowing Up until now, this study has focused primarily on students who hold credit cards and have credit card debt. We now investigate the other types of debt held by students and develop an understanding of the relationship between credit card debt, financial aid, and other types of borrowing. Besides credit card debt, some students incur other types of debt. See Table 13. Students who reported owing other debt indicated that they held private educational loans, car loans, mortgage debt, and/or other types of debt excluding credit card debt and financial aid loans. Table 13 reveals two important findings. First, students who hold credit cards are more likely to owe other types of debt as well.

• 27.8% of undergraduates and 47.2% of graduate students with credit cards owe some type of other debt. These percentages are compared to 20.3% of all students who do not have a credit card.

In addition, students with credit cards are also more likely to owe $1000 or more in other debt.

• 19.1% of undergraduates and 40.1% of graduate students with credit cards owe

$1000 or more in other debt compared to 15.3% of students without a credit card.

TABLE 13: Other Types of Borrowing by Students

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Undergrads w/ccs 27.8 19.1 11.7 5.2 0

Grad Students w/ccs 47.2 40.1 16.5 20.3 15.6

Students w/no ccs 20.3 15.3 11.9 1.7 1

Owe Other Debt

Owe $1000+ Other Debt

Priv. Loans for Education

Car Loan Mortgage

The second important finding is that, as with credit card debt, graduate students are more likely than undergraduates to owe some type of other debt and to owe $1000 or more of other debt. These findings again generate concern that graduate students may be taking on too much debt putting them at greater financial risk down the road. Financial Assistance Table 14 shows the types of financial assistance students receive. The three types of aid commonly received by undergraduates with credit cards are federal loans for education (42.8%), scholarships (37.2%), and need-based grants (26.5%). It should not be surprising that the type of financial assistance most received by graduate students with credit cards is tuition waivers (59.0%). 28.3% of graduate students also take out federal loans for education and 24.5% receive scholarships. The types of financial aid most received by students with no credit cards are the same as those received by undergraduates with credit cards--federal loans for education, scholarships, and need-based grants. However, students who do not have credit cards are less likely to take out federal loans for education than undergraduates with credit cards and more likely to be receiving a scholarship.

Table 14: Types of Financial Assistance Received

0 20 40 60 80

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Undergraduates N=446 37.2 42.8 26.5 11.4 8.1

Grad Students N=212 24.5 28.3 2.8 2.4 59

All Students N=835 39.5 34.5 27.1 13.6 14.1

Scholarships Federal Loans Need-Based

Grants Federal Work-

Study Tuition Waivers

Table 15 provides substantial insight into the usage of credit by students who are and are not receiving financial aid. In Table 15, all students are grouped together to include both undergraduates and graduate students. In addition, financial aid is defined to include need-based grants, federal loans for education, and/or federal work-study.

TABLE 15: Credit Card Use of Students With Credit Cards (Students Receiving Financial Aid vs. Students With No Financial Aid)

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Cards & FinAid 2.4 20.1 25.4 13.8 48.4 25.4 12 32.2

Cards & No FinAid 2.3 18.9 15.5 5.9 71.7 14.7 7.5 27.2

Ave. # of Cards

4+ Cards Owe

$1000+ Owe

$3000+ Pay

Balance Max Out Cards

Delin- quent

Were Rejected

According to Table 15, students with credit cards who are receiving financial aid are more likely than those with credit cards who are not receiving financial aid to have 4 or more cards, owe $1000 or more in credit card debt, and/or owe $3000 or more in credit card debt. They are also more likely to max out their cards, make late payments, and to have been rejected for a credit card. They are less likely to pay their balance in full each month. Students with credit cards who are receiving financial aid are also significantly more likely to owe some other type of debt. As a reminder, students who report holding some other type of debt include those who hold private educational loans, car loans, mortgage debt and any other type of debt excluding credit card debt and federal loans for education. According to Table 16,

• 45.2% of students with credit cards who are receiving financial aid owe some other type of debt and 33.9% owe more than $1000 in other debt. This is compared to 25.6 and 19.7% of those with credit cards who are not receiving financial aid, respectively.

In addition, those with credit cards who are receiving financial aid are more likely to have private education loans, a car loan, and/or a mortgage.

Table 16: Other Types of Debt Held by Students With Credit Cards by Financial Aid Status

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Cards & FinAid 45.2 33.9 22.6 11.7 4.2

Cards & No FinAid 25.6 19.7 6.1 8.8 5.6

Owe Other Debt Owe $1000+ Other Debt

Priv. Loans for Education

Car Loan Mortgage

Overall, the findings from Tables 15 and 16 suggest that students with credit cards who are receiving financial aid are more likely than those with credit cards to be at greater financial risk when they have to pay off their debts after graduation. As these tables indicate, these students are more likely to have difficulty managing their credit card debt. They are also more likely to hold large amounts of other debt. Students who may be at risk financially are a focal point of this report and a major concern of the OSFA. The next section of this report identifies those students who are most at risk for experiencing future financial problems. It also describes possible resources and services that OSFA and other campus and community organizations can offer students to help them better manage their credit card debt and other finances.

A Profile of At-Risk Students As previously mentioned, the majority of students at the University of Illinois appear to use credit cards responsibly and do not ho ld large credit card balances. However, there are some students on campus whose credit card usage puts them at financial risk, and an initial report on the findings from the OSFA survey would not be complete without a discussion of those students. Students with certain characteristics of credit card usage are more likely to accumulate high interest payments and large amounts of credit card debt upon graduation. We identify students at the University of Illinois as being financially at risk if they have one or more of the following characteristics: credit card balances of $1000 or more, four or more credit cards, only pay off their credit card balances some of the time or never, max out their credit cards and/or are delinquent on their credit card payments by two months or more. These students are more likely than those not at risk to be receiving some type of financial aid in the form of federal loans for education, need-based grants, and/or federal work-study. They are also more likely to be less knowledgeable about the amount of credit card debt they hold, their annual percentage rate (APR), and/or their borrowing limit. To gain a better understanding of those students who are at financial risk, we examine in detail the characteristics of those with credit card balances of $1000 or more and those with four or more credit cards. In this section, we group undergraduate and graduate students together. Table 17 lists the demographic characteristics of students who have $1000 or more in credit card debt. Those with credit card balances of $1000 or more are less likely to be single, female, and white than those with less than $1000 of credit card debt. They are more likely to be black and/or a graduate student.

TABLE 17: Demographics of Students With Credit Card Debt of $1000 or More

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Ccdebt >= $1000 74.6 52.3 63.1 11.5 11.5 46.9 53.1

Ccdebt < $1000 89.8 53.4 70.8 3 18 72.9 27.1

No credit cards 98.9 59.3 72.3 7.3 9.6 94.4 5.6

Single Female White Black Asian Undergrad Grad

Student

• 11.5% of students with $1000 or more of credit card debt are black compared to

3.0% of those with less than $1000 of credit card debt and 7.3% of those with no credit cards.

• A substantially large percentage of students with credit card balances of $1000 or

more are graduate students, 53.1%. Only 5.6% of students with no credit cards and 27.1% of students with less than $1000 credit card debt are graduate students.

These findings provide further evidence that graduate students may be at greater financial risk than undergraduates. Minorities may be at greater financial risk as well. Table 18 examines the financial practices of those with $1000 or more in credit card debt. Those students with credit card balances of $1000 or more are much more likely to be financially independent and to be working and renting. Thus, these students may have higher debt levels simply because they have the additional burden of having to support themselves. Interestingly, those with credit card balances of $1000 or more are also more likely to have a retail card.

TABLE 18: Students With Credit Card Debt of $1000 or More & Their Financial Practices

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Ccdebt >= $1000 60 76.9 74.6 66.9 46.2

Ccdebt < $1000 31.8 55.7 58.5 71.6 26.3

No credit cards 16.9 40.1 29.9 67.8 1

Independent Working Renting Budget monthly

Have retail card

• 60.0% of students with $1000 or more of credit card debt are financially

independent compared to only 31.8% of those with less than $1000 of credit card debt and 16.9% of those with no credit cards.

• It should not be surprising that 76.9% of students with $1000 or more of credit

card debt are working, especially since such a large percentage are supporting themselves financially. 55.7% of those with less than $1000 of credit card debt and 40.1% of those with no credit cards are working.

• 46.2% of students with $1000 or more of credit card debt have a retail card

compared to only 26.3% of those with less than $1000 of credit card debt and 1.0% of those with no credit cards. This finding is particularly interesting and warrants future investigation.

The results from Table 19 indicate that those students who hold $1000 or more in credit card debt are much more likely than those with less than $1000 in credit card debt to misuse their credit cards, causing them to be at even greater financial risk. Not surprisingly, those with credit card balances of $1000 or more, hold more credit cards, on average, and are much less likely to pay their balances in full each month.

TABLE 19: Students With Credit Card Debt of $1000 or More & Their Credit Card Usage

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Ccdebt >= $1000 3.4 10 41.5 20 47.7

Ccdebt < $1000 2.1 74.4 13.8 6.8 24.8

Average # cards

Pay balance in full

Max out cards

Late payments

Were rejected

• The average number of credit cards held by students with $1000 or more of credit

card debt are 3.4 compared to 2.1 for those with less than $1000 of credit card debt.

• Only 10.0% of those with $1000 or more of credit card debt pay their balances in

full each month compared to a surprisingly large, 74.4%, of those with credit card balances of less than $1000.

Moreover, as Table 19 indicates, students with $1000 or more of credit card debt are much more likely than those with less than $1000 of credit card debt to max out their credit cards, make late payments, and to have been rejected for a credit card. The differences are substantial. • Of those students with $1000 or more of credit card debt, 41.5% max out their

credit cards, 20.0% are delinquent by two months or more on their payments, and 47.7% have been rejected by a lender or for a credit card. Of those students with less than $1000 of credit card debt, only 13.8% max out their credit cards, 6.8% make late payments, and 24.8% have been turned down for a credit card.

With respect to other types of borrowing, Table 20 shows that those with credit card balances of $1000 or more are also significantly more likely to hold other types of debt. • Of those students with $1000 or more of credit card debt, 55.4% receive some

type of financial aid and 49.2% owe some type of other debt. Of those students with less than $1000 of credit card debt and no credit cards, 40.0% and 47.5% receive financial aid and 30.3% and 20.3% owe some type of other debt, respectively.

• A substantially large percentage of students with credit card debt of $1000 or

more, 45.1%, also owe $1000 or more in other debt compared to only 21.0% of students with less than $1000 in credit card debt and 15.3% of students with no credit cards.

Thus far, the findings provide strong evidence that those with credit card balances of $1000 or more are at greater financial risk than those with credit card balances of less than $1000. The results for those students with four or more credit cards are consistent with these findings suggesting that students who hold several credit cards are also at greater financial risk.

TABLE 20: Students With Credit Card Debt of $1000 or More & Other Borrowing

0 20

40 60 80

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Receive FinAid 55.4 40 47.5

Owe other debt 49.2 30.3 20.3

Over $1000 other debt 45.4 21 15.3

Ccdebt >= $1000 Ccdebt < $1000 No credit cards

Table 21 presents the demographic characteristics of tho se with four or more credit cards. Like those with $1000 or more in credit card debt, students with four or more credit cards are less likely to be single and white and more likely to be a graduate student than those with less than four credit cards or no credit cards. Unlike those with $1000 or more in credit card debt, students with four or more credit cards are slightly less likely to be black.

TABLE 21: Demographics of Students With Four or More Credit Cards

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Students w/4+ cards 78.1 59.3 66.4 4.7 15.6 52.3 47.7

Students 1,2,3 cards 88.9 51.7 70 4.7 17 71.5 28.5

Students w/No cards 98.9 59.3 72.3 7.3 9.6 94.4 5.6

Single Female White Black Asian Undergrad Grad

Student

Not surprisingly, Table 22 shows that those with four or more credit cards are much more likely to be financially independent, to be working, to be renting, and to have a retail card than those with less than four credit cards or no credit cards. Once again, these findings are consistent the findings for those holding $1000 or more in credit card debt.

TABLE 22: Students With Four or More Credit Cards & Their Financial Practices

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Students w/4+ cards 57 72.7 70.3 73.4 78.1

Students 1,2,3 cards 32.6 56.8 59.6 70 18.7

Students w/No cards 16.9 40.1 29.9 67.8 1

Independent Working Renting Budget monthly Have retail card

With respect to credit card usage, Table 23 indicates that those students with four or more credit cards are more likely than those with fewer than four cards to misuse their credit cards. Those with four or more credit cards are less likely to pay their balances in full each month and more likely to max out their credit cards and be rejected for a credit card than those holding fewer than four credit cards. Regardless of the number of credit cards held, approximately 10.0% of students are delinquent on their credit card payments. Table 24 shows that students holding four or more credit cards are more likely to not only hold other types of debt but to owe more than $1000 in other debt than those ho lding fewer than four credit cards or no credit cards. • Of those students holding four or more credit cards, 42.3% owe some type of

other debt. Of those students with fewer than four credit cards and no credit cards, only 32.1% and 20.3% owe some type of other debt, respectively.

• 32.8% of those with four or more credit cards owe $1000 or more in other debt

compared to 24.2% of those with fewer than four cards and 15.3% of those with no cards.

• Regardless of the number of credit cards held, about the same percentage of

students receive some form of financial aid. 44.5% of students with four or more credit cards receive financial aid, and 42.6% of those with fewer than four cards and 47.5% of those with no credit cards receive some type of financial aid.

TABLE 23: Students With Four or More Credit Cards & Their Credit Card Usage

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Students w/4+ cards 43.8 45.3 25 10.9 43

Students 1,2,3 cards 14 65.7 17.9 9.1 26

Owe $1000 or more

Pay balance in full Max out cards Late payments Were rejected

TABLE 24: Students With Four or More Credit Cards & Other Borrowing

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Receive FinAid 44.5 42.6 47.5

Owe other debt 42.3 32.1 20.3

Over $1000 other debt 32.8 24.2 15.3

Students w/4+ cards Students 1,2,3 cards Students w/No cards

Overall, the findings presented in this section provide strong evidence that those with credit card balances of $1000 or more are at greater financial risk than those with credit card balances of less than $1000. The findings further reveal that those holding four or more credit cards are also at financial risk. In general, these at-risk students are more likely to hold substantial balances of other types of debt. They are also more likely to misuse their credit cards and to have the additional burden of having to support themselves financially.

What types of services are useful to at-risk students? To gain insight into the services and preventative measures that would be most helpful to University of Illinois students, the OSFA asked students if they would “make use of any of the following if they were made available through the University":5 • Pamphlets and informational handouts about credit card debt • Pamphlets and informational handouts about money management • Self- help online information and/or Internet links to sites about credit card debt • Self- help online information and/or Internet links to sites about money management • Seminars/workshops on credit card debt • Seminars/workshops on money management • Counseling services concerning credit card debt • Counseling services concerning money management. We focus on the responses of those students who are financially at risk. Based on the results presented in this section, we expand our definition of “at-risk” and examine the responses of the following six groups: • students with credit card debt of $1000 or more • students with four or more credit cards • students who only pay off their credit card balances some of the time or never • students to max out their credit cards • students who report that they do not know their credit card balance, APR, and/or

credit card limit • students who are delinquent on their credit card payments by two months or more. Table 25 identifies the services that at-risk students would use if made available on campus. Three findings are of particular interest. • In general, students who are at risk would most prefer to have online access to

financial information. According to Table 16, students rank online information on money management as their first choice, online information on credit card debt as their second choice, and materials on money management as their third choice.

5 Students could select more than one service so the percentages do not some to 100 percent.

• Regardless of the mode of delivery, at-risk students prefer to receive information on money management rather than credit card debt. This finding may be due to the wording of the survey questions. Perhaps, if the survey had asked students about “credit card management” rather than “credit card debt,” students would have indicated that they would be equally likely to use services related to both credit card debt and money management.

• Interestingly, of all the at-risk groups, those students who report being delinquent

on their credit card payments by two months or more appear to be more likely than other at-risk groups to use some type of service if offered by the University.

These findings provide substantial insight into the types of services and programs that the Office of Student Financial Aid and other campus organizations may want to offer to assist students who are financially at-risk. We make several recommendations at the end of this report. We also identify some of the preventative measures that are already underway to help students who are confronted with excessive credit card debt and/or other financial problems while attending the University of Illinois.

Table 25: At-Risk Students Who Would Use the Following University Services

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CCdebt $1000 or more 34.6 46.2 46.2 48.5 3.1 38.5 33.1 36.2

4+ Credit Cards 23.4 35.2 33.6 39.1 18 27.3 17.2 24.2

Pay sometimes/never 29 42.9 39.3 45.2 24.6 31.3 25.8 30.6

Max out cards 25.2 38.6 37 45.7 29.1 35.4 27.6 32.3

Don't know balance/APR/card limit 16.7 32.5 18.7 32 10.3 18.2 9.9 16.3

Delinquent on CCpayments 41.9 48.4 48.4 56.5 41.9 54.8 38.7 50

Pamph - cc

Pamph - mm

Online - cc

Online - mm

Seminar - cc

Seminar - mm

Couns - cc

Couns - mm

Summary of Major Findings • Overall, the financial practices of undergraduates who use credit cards at the University

of Illinois appear to be very similar to other colleges and universities around the country. The majority of students at the University of Illinois have credit cards. Some carry substantial balances. However, most students use credit cards responsibly and do not appear to accumulate large amounts of debt. The survey data indicate that the majority of students pay off their entire balances each month. In addition, average monthly balances held by students appear to be manageable. 86.3% of undergraduate students and 67.5% of graduate students with credit cards report average balances of less than $1000.

• Graduate students at the University of Illinois may be at greater financial risk than

undergraduates. Graduate students are more likely than undergraduates to have credit cards and more of them. They also tend to have larger debt burdens than undergraduates, They are less likely to pay their balances in full each month and more likely to max out their credit cards, make late payments, and be turned down by a credit card company for a credit card. As with credit card debt, graduate students are more likely than undergraduates to owe some type of other debt and to owe $1000 or more of other debt. It is important to keep in mind that graduate students are likely to have higher expected incomes and be in a better financial position to repay their balances when they graduate than undergraduates. However, this does not explain why graduate students are more likely than undergraduates to max out their credit cards and make late payments. These findings raise concerns that graduate students may be misusing their credit cards and taking on too much debt putting them at greater financial risk down the road. Little research has been done to address the financial concerns of graduate students. Future research should examine these issues.

• Students with credit card debt are much more likely to hold student loans as well as other

types of debt. Thus, those with credit card debt are more likely to borrow more in general. In addition, students with credit cards who are receiving financial aid are more likely than those with credit cards who are not receiving financial aid to have difficulty managing their credit card debt. They are not only more likely to hold other types of debt besides financial aid, but they are also more likely to hold larger amounts of other debt. The results suggest that students with credit cards who are receiving financial aid may be at greater financial risk when they have to pay off their debts after graduation. Again, this issue has not been adequately addressed in the research.

• Students lack a sense of financial reality. In examining the “write-in” survey responses,

it became apparent that some students believe they are doing well managing their finances when in actuality they are not. In addition, some students appear to lack a clear understanding of key financial concepts. Student responses indicated that they were unsure of the differences between a credit card and debit card. They were also confused about retail cards and the definition of a financial institution. The confusion may have

been due not to a lack of financial knowledge but to the wording of the survey questions. Regardless, there still appears to be some need for general financial education on campus.

• While most students at the University of Illinois use credit cards responsibly, there are

some students on campus whose credit card behavior puts them at greater risk for high debt levels and misuse of credit after graduation. Students with certain characteristics of credit card usage are more likely to accumulate high interest payments and large amounts of credit card debt. We identify students at the University of Illinois as being financially “at-risk” if they have one or more of the following characteristics: credit card balances of $1000 or more, four or more credit cards, only pay off their credit card balances some of the time or never, max out their credit cards and/or are delinquent on their credit card payments by two months or more. These students are more likely than those not at risk to receive some type of financial aid in the form of federal loans, need-based grants, and/or federal work-study and to hold substantial balances of other types of debt. In addition, they are more likely to be less knowledgeable about the amount of credit card debt they hold, their annual percentage rate (APR), and/or their borrowing limit. They are also more likely to misuse their credit cards and to have the additional burden of having to support themselves financially.

• Students were asked about the financial services they would use if made available on

campus. In general, at-risk students prefer to have online access to financial information. They rank online information on money management as their first choice, online information on credit card debt as their second choice, and materials on money management as their third choice. Regardless of the mode of delivery, at-risk students also prefer to receive information on money management rather than credit card debt. These findings are of particular importance as we think of ways to help students at the University of Illinois better manage their credit card debt and other finances.

Other Important Findings and Future Research In conducting our analysis, a few additional observations were made. We do not discuss these issues in detail in this report. Instead, we point out their significance and save them for future research. • First, we find that female college students are at greater financial risk than male college

students. While males are more likely to have at least one credit card, females with credit cards are more likely than male s with credit cards to hold 4 or more credit cards, to owe more than $3000 in credit card debt, to be delinquent on their credit card payments, to receive financial assistance, and to hold other types of debt. Female students with credit cards are less likely than males with credit cards to know their credit card balance, annual

percentage rate, and/or their credit card limit. However, females are more likely than males to use financial services if offered by the University.

• Second, we also find evidence that blacks are at substantially greater risk than whites,

Asians, and Hispanics. Black students at the University of Illinois hold the largest credit card balances on campus. They are also the most likely to receive financial assistance. In addition, they are more likely than other ethnicities to owe $1000 or more in other debt, to max out their credit cards, make late payments, and/or be turned down for a credit card by a credit card company. They are the least likely group on campus to pay their balances in full each month. While the sample of black students is small, there is clear evidence that they are perhaps the most at-risk for having large debt burdens and misusing credit cards. These findings clearly indicate a need for financial education programs that target financially at-risk groups such as female and black students to ensure that they are not at a financial disadvantage.

This report also points to the need for more in depth research and analysis in the area of student credit usage. • Past studies have examined the credit card usage, attitudes towards credit, and financial

knowledge and practices of college students. However, they have not attempted to identify and develop a clear understanding of those who are at financial risk. This report has focused on characterizing the credit card usage of students at the University of Illinois and identifying those students who are financially at-risk. However, this report still does not adequately address why more and more students are incurring excessive debt, and why some students are more “at-risk” than others. Special attention needs to be given to this issue, and more complicated analysis needs to be conducted. Currently, Angela Lyons, assistant professor at the University of Illinois, is working to address this issue in a series of research papers.

• Finally, recent media attention has focused on growing concerns that students are accumulating too much debt to the point that they are unable to repay these debts when they graduate. Despite this recent attention, very little is known about the actual ability of recent college graduates to manage their accumulated debt after graduation. This is primarily due to a lack of longitudinal data on students. Longitudinal studies are needed to examine the role that credit card usage and credit card debt play in the post-college lives of students.

Recommendations for the University of Illinois and Beyond As we have indicated throughout this report, the majority of college students at the University of Illinois appear to use credit cards responsibly. However, there are some students on campus who are financially at risk for accumulating large amounts of debt and misusing credit cards after graduation. Because of their inexperience with credit, some students may not have the knowledge and confidence to manage their debts and other finances. For this reason, we should not be surprised that some college students are at a greater risk for having substantial debt burdens than more experienced credit consumers. There is growing evidence that individuals who receive financial education and utilize financial management skills at a young age tend to do better financially than those who do not receive financial education (Stranger, 1997 and Varcoe et al., 2001). Most students come to college with an academic plan, but few come with a financ ial plan. In this section, we identify the resources and services that the OSFA and other campus and community organizations can offer to University of Illinois students to help them better manage their finances and use credit responsibly. Our recommendations are summarized below and are in no particular order of priority: • We would like to see the University of Illinois require credit card vendors who come to

campus to hand out materials on responsible credit card usage along with credit card applications. They could also conduct educational presentations.

• We would also like to see financial education instruction presented to incoming students

along with their parents as part of freshman orientation. The financial instruction would include discussions on subjects concerning budgeting and respons ible use of credit. Currently, efforts are underway to include some form of financial education as part of freshman orientation in Fall 2002.

• Seminars/workshops could also be given during the year to small groups of students on the

subjects of money management and credit usage. These small group meetings would be ideal for targeting students who are at greater financial risk such as graduate students, female and black students, and possibly international students. Perhaps, these seminars/workshops could be offered through student organizations on campus.

• In addition, financial counseling services could be offered by the University, perhaps in

conjunction with Student Services and the OSFA. At Brigham Young University (BYU), students are required to file a financial plan with the Financial Aid Office before their loan eligibility is certified (Weston, 2001). Filing a financial plan makes students aware of how much they will need to borrow to finance their education. It also helps students to identify whether or not they will be able to repay their loans after graduation and still maintain a

comfortable standard of living. As a result of BYU’s counseling program, Stafford Loan amounts have decreased by 27% since Fall 1998.

• Recall that the results of the OSFA survey indicate that students who are financially at-risk

would prefer to receive information on money management and credit card debt online rather than in the form of informational materials, seminars, workshops, and/or counseling services. Providing online financial management services gives students the option to receive information on sensitive financial issues by themselves and at their own convenience.

Currently, there are efforts underway to provide online financial services and improve the financial know-how of students at the University of Illinois. To address questions related to financial assistance, the Office of Student Financial Aid at the University of Illinois has introduced a new web-based customer support site called “Ask Us,” which can be accessed through their website at: http://www.osfa.uiuc.edu. “Ask Us” offers a 24-hour, online, easy-to- navigate, question and answer format that prospective students, parents, guidance counselors, and other interested visitors can use to find answers to their financial aid questions related to our university campus. Visitors may browse the list of most frequently asked questions or use financial aid keywords or phrases to search for information on a specific financial aid topic. Individuals search the knowledge base first and if they still need more information about a specific financial aid topic, they can submit their question to the OSFA. Financial aid administrators respond to all questions within 72 hours. An online folder called “My Stuff” is automatically created for the visitor to keep track of their questions and answers. They may view the contents of their “My Stuff” folder at any time and request to be notified if an answer is updated in the future. Initial feedback regarding this feature of “Ask Us” has been extremely positive. To address the broader financial education needs of students, Angela Lyons, assistant professor of consumer and family economics at the University of Illinois is designing a web-based, financ ial literacy program for Illinois students called $tudent $marts. She and members of the University of Illinois Extension Consumer and Family Economics Team are beginning to work with various campus and community organizations around the state of Illinois to design and implement this web-based program. The program will target high school, college, and community college students between the ages of 18 and 21 who are financially at-risk in the state of Illinois. Information and hands-on activities will be developed on the following topics: budgeting, student loans, credit usage, interest payments, and savings and investment—special emphasis will be placed on credit usage. Upon completion of the website, materials will be developed and distributed to representatives at high schools, community colleges, and colleges and universities around the state of Illinois. Training sessions will be offered to representatives to prepare them for incorporating the materials into their institution whether it be in the classroom, campus workshops, freshmen orientation series, et cetera. Additional lessons will be developed for graduating college seniors on topics related to: retirement planning, investing, purchasing a house, repaying student loans, and choosing an insurance plan. The ultimate goal

of this program will be to help students build financial knowledge, make informed financial decisions, use financial services responsibly, and develop a sense of financial independence. Final Comments The main objective s of this report have been to 1) provide greater insight into the credit usage of college students at the University of Illinois and 2) to encourage the University of Illinois, other campuses, and community and state organizations to identify ways in which they can help students to better manage their credit usage and avoid future misuse of credit down the road. This report provides some intriguing findings, especially with respect to those students who are most at risk financially. However, there is still much work to be done before our understanding is complete. We hope that other researchers and educators can use this report as a foundation for future research and curriculum development.

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Appendix Survey Response Rates (11/9/01-12/9/01) E-mails were sent to 2,650 students (approximately 7.0% of the student population.) Date Day # of Responses Notifications Return Rate 11/8 Thur Survey Online 11/9 Fri 378 1st e-mail 10% 11/12 Mon 427 11/13 Tues 430 11/14 Wed 443 11/15 Thur 536 2nd e-mail 14% 11/16 Fri 615 11/19 Mon 632 11/20 Tues 641 11/21 Wed 656 11/22 Thur Thanksgiving Break -- 11/23 Fri Thanksgiving Break -- 11/26 Mon 656 -- 11/27 Tues 657 11/28 Wed 805 3rd e-mail 30% 11/29 Thur 819 11/30 Fri 831 4th e-mail 31% 12/3 Mon 899 12/4 Tues 907 12/5 Wed 907 12/6 Thur 907 12/7 Fri 915 12/7/ Fri Survey closes TOTAL 31 days 915 responses 4 mass e-mails 34% return rate Total 835 valid responses

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