Survey: Students Fail the Credit Card Test

American college students are laden with credit cards, use them frequently, and have no idea what they are doing. Consequently, they are swamped with debt -- and the problem is growing worse by the year.

Those are among the discouraging findings of an academic paper on credit card debt and the larger, even more troubling issue of general financial literacy on campus. Results of the survey, conducted by researchers from five American universities, were published in April 2012, coinciding with Financial Literacy Month, and the findings are disquieting.

The primary takeaways: 70% of American college students have credit cards, five of every six of those students do not know their cards' interest rates, 75% of them do not know their late payment charges and 70% of them do not know what their over-balance-limit fees might be.

The result is predictable -- more than 90% of college students who hold credit cards are carrying monthly credit card debt.

"Our students lacked even basic financial knowledge of a common credit tool that many of our students used every day," the study concluded. "There is no way to describe these results as a success in education of financial literacy."

And these were business students

It gets worse. Nearly all of the 725 students who took the survey in fall 2009 were business majors -- young people likely to be among the most financially astute of their generation. Credit card knowledge and general financial literacy are likely even worse among others of the millennial generation, both on campus and off campus.

"In America, credit cards on campus have been a disaster, leaving students buried in debt before graduation, often with little hope of paying off the debt before high fees and interest double the amount," the study's authors said.

Others who have studied the problem see even wider implications.

"It's not just college students -- it stems across the younger age group," said David Wegge, a professor at St. Norbert College in De Pere, Wisc., executive director of the Strategic Research Center at the school and board chairman of the iOme Challenge, an annual college competition intended to enhance retirement planning and financial literacy on campus.

"You could argue that college students ought to be better educated about these things," Wegge said. "But you could also argue that young people out in the work force, from a practical standpoint, should be more educated about this because they see these [financial] issues in play every day."

Key findings

Among other findings of the study, "Financial Literacy and Credit Cards: A Multi Campus Survey:"

  • This study and previous surveys find that "credit card use has snowballed in the last decade" on campus. In 2004, the average college student had $946 in credit card debt. By 2009, the average stood at more than $4,100.
  • Though the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 sharply curtailed the distribution of credit cards to college students, it came after decades of campus-related hyperactivity by credit card companies.

"Some have exclaimed that credit cards are [a] greater threat on campus than alcohol or sexually transmitted diseases ... ," the study's authors said. "It is too late to implement a ban when nearly every student already has a credit card."

  • Of the 70% of surveyed college students who carried credit cards, more than one in three of those young people had two or more cards. About half claimed to use the cards only for emergencies, with 13% saying they used the cards frequently.

"This study has it right," Wegge said. "A lot of students have been lured into getting credit cards by companies that often set low initial limits and then start pumping them up. They get into it as a way to enhance their cash flow, but they're not really thinking too much about the long-term ramifications about what they're getting themselves into."

  • Only 9.4% of credit-card-carrying college students paid off their debt in full each month, a sharp drop from the 32% found by a survey in 2003. "This change could be caused by the economic downturn as students struggle financially and must keep a balance on their credit cards," the researchers noted.
  • Demographically, younger students used credit cards more often than older students, students who had taken an ethics class tended to be more aware of interest rates, employed students and married students tended to be more responsible users of credit cards, and gender made no significant difference.
  • The general on-campus ignorance concerning interest rates, late payment charges and over-limit fees shocked the researchers, particularly when it came to interest rates. Only 14.6% of the surveyed students claimed to know their interest rates -- and the actual percentage probably was much lower.

"Since the interest rate is the primary cost of credit, a financially literate student should know the interest rate he/she is paying," the study said. "We predicted this amount to be high, since so many credit card issuers advertise these rates as a key marketing tool. We were surprised, but not in a good way."

The survey was conducted by researchers at the University of Central Oklahoma, Midwestern State University in Texas, Texas A&M University, the University of Texas and Framingham State University in Massachusetts. It was published in the April 2012 edition of the International Journal of Business and Social Science.

In the end, the conclusions were disturbing.

"This result may also explain part of our national problem with credit," the study said. "If our college students do not understand credit costs, what can we expect from the larger portion of our society without a college education?

"These results should serve as a wakeup call for both our college students and our college outreach efforts into the community to train people about the costs of credit. It is clear the status quo of financial literacy is a failure."

Financial writer Martin Merzer has a particular interest in on-campus financial literacy and serves as a judge of the annual collegiate iOme Challenge.