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Report: Consumer Protection
The Campus Credit Trap
Credit card lending is enormously profitable. According to annual Federal Reserve Board of Governors’ (FRB) Reports to Congress, it is the most profitable form of banking. But the credit card industry is saturated. The average adult had nearly five credit cards in 2006 and the average household received 5.7 credit card solicitations monthly in 2004, according to the 2007 FRB report.1 Banks seeking even greater profits from credit cards have several options:
First, as has been widely reported and is the subject of Congressional inquiries, banks can squeeze their existing customers for greater profits in several ways: including (1) using a variety of rewards and tricks such as encouraging extremely low minimum payments to maintain highly-profitable high revolving card balances; (2) raising interest rates on those balances through a variety of traps including imposition of penalty interest rates for late payments and changing due dates to encourage more of those late payments; (3) using misleading teaser rates and, (4) raising the rates of otherwise good customers by claiming that their credit score had declined or that they were late to another lender (called “universal default”);2
Second, banks can market to customers of other credit card companies, urging them to switch by offering low teaser rates on balance transfers and other incentives. But this marketing is expensive both because of the cost of the zero-interest offers and the cost of sending out the billions of solicitations;
Finally, banks can seek out customers who have never had a card. College students are among the most prominent targets for this marketing.3 They are young and understand that they need credit to get ahead in the world. Some need credit because of the rising cost of a college education. Finally, most of them are clumped together on campuses that they either commute to or live at. This makes them easy to target. Companies use a variety of techniques, from buying lists from schools and entering into exclusive marketing arrangements with schools to marketing directly to students through the mail, over the phone, on bulletin boards and through aggressive on-campus and “near-campus” tabling-- facilitated by “free gifts.”
This study is an in-person survey of a diverse sample of over 1500 students, primarily single undergraduates, at 40 large and small schools and universities in 14 states around the country conducted between October 2007 and February 2008. It analyzes how students pay for their education, how many use and how they use their credit cards and, finally, their attitudes toward credit card marketing on campus and whether or not they support principles to rein in credit card marketing on campus.
The findings confirm that students are using credit cards in significant numbers and that a significant number are paying the price through late fees, high balances and delinquencies. The findings also show that banks are marketing aggressively to students through a variety of channels. Finally, the findings demonstrate that an overwhelmingly majority of students support limits on credit card marketing on campus to rein in unfair bank practices.
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