College Students and Credit Cards

As students head back to college campuses this fall, a perennial debate will resume over the problems some of them have in handling their credit cards. Marketing research surveys indicate that about 57% of all full-time undergraduates own a general-purpose credit card (Visa, MasterCard, Discover, American Express) in their own name. From the sad anecdotes portrayed in the news media, one could get the impression that students are awash in debt, victims of relentless marketing by big credit card companies and incapable of controlling their urge to charge.

A new study published by the Credit Research Center at Georgetown University's McDonough School of Business brings new evidence to the discussion and paints a different picture. Authors Michael Staten (Georgetown University) and John Barron (Purdue University) provide benchmark measures of prominent attributes of college student credit card usage. Their report, titled "College Student Credit Card Usage," (available at www.msb.edu/prog/crc) utilizes a pooled sample of over 300,000 credit card accounts randomly selected from the portfolios of five of the top 15 general-purpose credit card issuers in the U.S.

Discussions of college student card usage in both the policy arena and the popular press have mostly been based on anecdotes and self-reported survey evidence. To our knowledge the Georgetown study is the first time account-level information has been pooled across major issuers to create a statistically reliable database for examining the actual usage and performance of credit cards marketed to college students. Consequently, the results should be helpful in grounding the subsequent debate on facts rather than anecdotes.

The analysis compares behavior across three types of accounts: those opened through college student card marketing programs, those opened by young adults aged 18-24 through normal marketing channels (i.e., not through dedicated student marketing programs), and those opened by older adults through normal marketing channels. All accounts analyzed in this study were opened during the period mid-1998 until early 2000 and observed over twelve-month periods during 2000-2001. The analysis follows a study plan that was originally proposed by the U.S. General Accounting Office in response to a request from members of Congress, but was never executed due to budget constraints. The study is similar to the GAO study plan in the range of cardholder behaviors to be examined and shares its focus on comparing the activity of recently-opened student accounts to the experience of accounts opened recently through conventional (non-student) marketing programs.

The analysis in the report is restricted to a sample of more than 300,000 active accounts, each of which is followed for a twelve-month period. Active accounts are defined as accounts with charge activity, payment, positive balance or some other posting of activity at any point during the observation period. Given this large sample size, the random sampling approach adopted by the participating companies, the market share and national scope of the companies providing the data, and the use of weights to reflect the relative number of cards issued across the various groups by each company, the findings reported below can be considered representative of accounts opened at major credit card issuers during the period from mid-1998 through early 2000 that were active during the 2000-2001 period.

Results

Credit Balances, Credit Limits, and Utilization Rates

• The average balance of an active student credit card account ($552) is approximately one-third the size of the average balance of an active non-student account of a young adult ($1,465), and one-fourth the size of the average balance for an active older adult account ($2,342).

• The mean credit limit for student accounts ($1,395) is less than 40% of the mean for non-student accounts of young adults ($3,581) and less than 20% that of adult accounts ($7,436).

• Lower credit limits for student accounts generally lead to higher utilization rates. However, among cardholders who have credit limits above $1,000, student accounts tend to have the lowest utilization rates.

Card Usage: Charges, Cash Advances, and Paying the Full Balance

• Among accounts with positive balances, student accounts are the most likely in any given month to pay the prior balance in full.

• Student accounts are substantially less likely to use the credit cards for cash advances.

• A student account is less likely to incur finance charges in a given month, but more likely to incur fees, either for being late or for being over the credit limit. Only 5 percent of student accounts incur a finance charge greater than $26 in a given month.

Delinquency Rates, Charge-offs, Dollars at Risk, and Revenues

• Delinquency rates on both student accounts and young adult, non-student accounts are higher than for older adult account holders. However, student accounts that have large balances (e.g., accounts with an outstanding balance greater than $1,000) have lower delinquency rates than young adult, not-student accounts.
  
  
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• About 3.6% of student accounts charge-off annually, compared to 2.8% of young adult, non-student accounts and 1.6% of older adult accounts. However, large-dollar charge-offs are not common among student accounts given their substantially lower average balances. Considering only charge-offs that exceed $5,000, student account losses are rare. For every 10,000 accounts of each type, the dataset indicates there would be 77 adult accounts with charge-offs exceeding $5,000 over a one-year period, 58 such charge-offs for non-student accounts of young adults, but only 2 such charge-offs for student accounts.

• Over time, student accounts mature and performance converges to that of young adult, non-student accounts. More specifically, a student account approaching the end of its second year has a frequency of delinquency and a likelihood of charge-off quite similar to that of non-student accounts held by cardholders under the age of 25.

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Conclusion

The data indicate that, in general, student-marketed accounts have smaller balances, lower credit limits, and lower utilization rates than accounts of similar age that were opened by young adults through issuers' conventional (non-student) marketing programs. Compared to older adult accounts, balances and limits are substantially lower on student accounts. 87.9% of student accounts are current (i.e., pay their accounts as agreed) in a given month, compared to 88.4% of young adult, non-student accounts and 91.9% of older adult accounts.

Although recently opened student accounts are more likely to be delinquent and have a higher likelihood of a charge-off compared to other groups, the dollar amounts at risk on delinquent accounts and the actual losses on charged-off accounts are substantially lower. Further, the delinquency and charge-off experience for student accounts becomes similar to non-student accounts of young adults for accounts open more than one and one-half years. These findings are consistent with issuers' statements that they establish student accounts with relatively low credit limits with the expectation that the large majority of new, young cardholders will learn how to manage a credit card, establish a credit history and become longer-term customers.