Credit card use is steadily on the rise and the proportion of students with credit cards is likewise on the upswing. This raises concern on the overall debt burden faced by students even before starting full-time work as professionals. This paper reports on the credit card usage of Fort Hays State University (FHSU) students based on a mail survey conducted in the spring semester of 2005. Students were asked information on their financial resources, spending patterns, employment, and debt. Results suggest that credit card use by FHSU students compares positively to most recent national and Midwest estimates from Nellie Mae. A majority of the students have credit cards (68%), holding an average of 2.78 cards. While 32 percent reported zero balances, those reporting positive balances had an average unpaid balance of $1,531.53. About 77 percent of students with unpaid balances on their credit cards have student loans as well—more than half of them (61%) with loans under $11,000.
The use of credit cards as a readily available source of funds to finance consumer spending is steadily on the rise. Factors believed to contribute to this are the increased availability of credit cards and aggressive marketing by the credit card industry (Hayhoe, et. al. 1999). Due to the competitive pressure to recruit new clients, college students are also targeted, and as a result, the proportion of college students with credit cards is also on the rise (Manning 2002).
Credit cards facilitate two distinct services: (1) a convenient transaction medium in which balances are paid off in full each month; and/or (2) a debt/ borrowing medium (Cargill and Wendell 1996) which allows higher levels of consumer spending than would otherwise be available.
The easy access to credit cards combined with the increasing social pressure to enjoy a more extravagant college lifestyle increases the likelihood of college students building up credit card debt. This debt, along with the burden of student loans to finance their education, adds to the debt burden faced by college students. In addition, there is the issue of students’ financial responsibility in handling credit card debt and the consequences of mismanaging debt. It is, therefore, important to examine credit card usage among college students and identify potential problem areas. Previous studies on credit card usage among college students found that although the majority the students handle their credit responsibly, there is a significant minority who have problems. The studies pointed out the need for on-campus financial education or counseling (Cunningham 2002; Norvilitis and Santa Maria 2002).
The Fort Hays State University Office of the Provost and Office of Student Affairs sponsored a student survey which was administered by the Docking Institute of Public Affairs at FHSU. The self-administered mail survey gathered information regarding student financial resources, spending patterns, employment activities, and debt. This paper focuses on the results of the credit card usage portion of the survey. The data were collected in the spring semester of 2005 from a random sample of 1,500 undergraduate and graduate students at FHSU taking at least six credit hours. After a second-wave mailing to non-responders, approximately two weeks after the initial mailing, a subsequent e-mail reminder, and a phone call follow-up, 411 completed surveys were returned yielding a response rate of 27.4%. Our sample of 411 students is a good representation of the university population and even larger than the national Nellie Mae estimate which only had 132 respondents.
The final sample closely resembles the original sampling frame on most characteristics with a slight under-representation of males (36% compared to 48.1% females), an under-representation of majors from the College of Arts and Sciences (30.9% compared to 36.7% for the rest of the University), an over-representation from the College of Business and Leadership (26.5% compared to 17.9% for the rest of the University), and a slight under representation of freshmen (15.7% compared to 19.1% for upper classmen and graduate students).2
The majority of the students surveyed hold general purpose credit cards—bank cards (Visa, MasterCard, etc.) and charge cards limited to a single business, such as department store/retail cards and gasoline cards. Sixty-eight percent had at least one of these credit cards. This number is lower than the most recent national estimate by Nellie May, in 2004, of 76%. (That estimate includes only undergraduates; our sample includes undergraduates and graduate students). And it is even lower when compared to the Midwest region’s estimate of 82%. Of the 68% with cards, 45.6% said they obtained them in their first or second year of college, while 38.2% had obtained a card even before entering college (Table 1).
Credit card ownership increases with the academic class level of the student, lowest for freshmen at 41.7% and highest for graduate students at 90%. The Analysis of Variance (ANOVA) between groups indicates the percentages of students with credit cards within each class level are statistically different (F-stat = 14.12 and p-value = 0). Table 2 illustrates that the percentage of students with credit cards for freshmen is statistically significantly lower than all the upper class levels and the percentage of students with credit cards for graduate students is significantly higher than all lower class levels.
Students from the College of Business and Leadership (COBL) seem to be more likely to have credit cards relative to other majors. Seventy-five percent of those reporting from the COBL hold credit cards while 65% of those from all the other colleges in the university have credit cards. This difference is significant at the 10% level (F-stat = 3.32, p-value = 0.069).
As discussed in the previous section, college students are one segment of the population being pursued by the credit card industry as potential customers. Financial institutions use different strategies to market credit cards. The respondents in the survey were given a number of these strategies and asked how important they were in their decision to get any credit cards. Results are summarized in Table 3.
The largest share of students (51.7%) say the interest rate on the card (which reflects the price variable on the demand for credit cards as a borrowing medium) is very important in their decision to get the card. This is followed by pre-approved solicitations through the mail.
Students whose attitudes are more accepting and positive towards debt are more likely to hold credit cards. Table 4 demonstrates this. About 50% of students with credit cards agree that debt is a normal part of today’s lifestyle and about 66% agree that borrowing for emergencies is acceptable.
The percentage of white students with a credit card is 67.8% compared to 65.2% for Non-whites (includes Black, Asian/Pacific Islander, American Indian and others). Out of all students with credit cards, 95% are white. It is also worth noting that almost equal percentages of female and male students have a credit card, with 67.9% female compared to 67.6% male. A larger proportion of married students carry credit cards (84.6%) compared to 64.5% for those who are single.
The survey also provides several measures of the credit card holder’s financial resources. These include personal income from employment, allowance from parents/relatives, spouse’s employment if married, savings, scholarships, grants, student loans, and other sources. Figure 1 illustrates the student’s overall personal income in the last year from all of the resources listed above. Twenty-eight percent reported an overall personal income between $5,000 and $9,999.
The survey shows that an FHSU student who holds a credit card has an average of 2.78 cards in his name. Thirty-one percent hold one card, while 8.6% hold more than five cards (Figure 2). These numbers are slightly below the latest estimate from Nellie Mae, in 2004, where the national average is 4.09 cards and the Midwest average is 4.76. These results may reflect the geographical location of FHSU, which is relatively rural compared to other cities in the nation and to other Midwestern cities, in particular.
If we categorize according to academic class level, the number of credit cards held by students also increases with class level. Freshmen hold an average of 1.8 cards, sophomores hold an average of 2.2 cards, juniors 2.8 cards, seniors 2.9 cards, and graduate students held on average 3.5 cards in their name. The average number of cards held across academic class levels are significantly different (F-stat = 3.75, p-value = 0.005). Table 5 illustrates, in particular, that the mean number of cards held by freshmen is significantly lower than those of seniors and graduate students.
Given that the majority of students carry credit cards, the next important consideration is the dollar amount of the balance they carry. This may provide insight to whether students use credit cards mainly as a transactions medium or as a borrowing medium. If used mainly as a borrowing medium, this will have implications on the overall debt burden faced by students.
The average unpaid credit card balance reported by students as of the survey date is $1,043. The national and Midwest averages provided by Nellie Mae, in 2004, is $2,169 and $2,498, respectively. In this regard, FHSU students are in a better position than students in the nation and the Midwest. Thirty-two percent of the students with credit cards in the survey had no outstanding balance, a much higher proportion than the Nellie Mae national estimate of only 13%. Table 6 shows the distribution of unpaid balances for student credit card holders.
A more distinct delineation of card usage for transactions purposes vs. borrowing could be made if we had specific information on the average amount of a student’s unpaid balance at any given month. If balances are on average zero at the end for any given month, then we could clearly deduce that credit cards mainly facilitate transactions for convenience. At best, we only have information on total unpaid balances at the time of the survey and categorical answers to the question ‘how much of your credit card balance is usually paid every month?
The higher proportion of students carrying balances (68%) suggests credit card use is slightly more prevalent as a borrowing medium than as a transactions medium, even with the majority holding relatively low balances. The low percentage of students carrying a balance of more than $1,000 would indicate that they are still in control of their debt. The latest estimate shows national and Midwest average credit card debt is over $1,000: $2,169 for national and $2,498 for the Midwest. In fact when we look at how students answered the question ‘how much of your credit card balance is usually paid every month?,’ the proportion who indicated paying the full balance every month is more than half (55.5%). Only about 1% reported not being able to pay the monthly minimum balance.
From those students reporting positive balances, perhaps a more relevant piece of information to consider is the mean balance held. For this specific sub sample, the average credit card balance held is $1,532.
Unpaid balances likewise increase with the student’s academic class level. Graduate students carry an average of $1,981 unpaid debt in their credit cards while freshmen students have an average of $863 (Table 7). However, the comparison of means test (ANOVA) indicates that unpaid balances do differ significantly across student classification only at the 10% level (F-stat = 2.22, p-value = 0.069). The more defined break in the amount of unpaid balances appears to occur between junior and senior years. It may be that seniors (and older students) have access to a higher credit line, and/or hold more credit cards (as shown earlier), and also have greater ability to pay. Seniors are closer to getting their degrees and the prospect of a higher paying job may be more definite. Thus, they may feel more comfortable in using their cards for spending and/or borrowing. It is also possible that they may have higher expenditures, and credit cards may be one financing option.
Given that credit cards can facilitate a transaction (for convenience) or debt (as a borrowing medium), the use of credit cards is related to personal income and/or overall financial wealth. If used mainly as a transaction medium (for convenience), income and wealth put credit card holders in a better position to pay off credit card debt monthly. On the other hand, income and wealth would reduce the need to use credit cards if used as a borrowing medium.
Table 8 presents a cross-tabulation of categories of balances held vs. reported overall financial resources within the last year. The chi-squared test indicates that the credit card balance held is related to the overall financial resources of the student (i2 = 50.33, p-value = 0)
Obviously, who actually pays for the student’s credit card bills will have an impact on the amount of unpaid balances. Students are responsible for paying off the majority of their balances.
Another factor that may influence credit card debt is whether or not these students were facing rejection on a credit line increase request. Students who are credit constrained may have greater utility for credit cards as a borrowing medium since the constraint may indicate greater need. This may also provide insight into responsible use of credit cards and a good credit rating. A rejection on a credit line increase request can be a signal from lenders on how student borrowing behavior is perceived. The FHSU survey shows that only 2.2% who requested a credit line increase within the last year have been rejected.
Another possible indicator in determining whether credit cards are used as a borrowing or a transactions medium is the frequency of use. If credit cards are used less frequently combined with high levels of unpaid balances, this may indicate credit cards are used mainly as a borrowing medium. On the other hand, if cards are used more frequently and have low unpaid balances, this would imply cards are mainly used for transaction convenience. About 43% of students use their credit card occasionally (at least once a month) and only 5.5% use their card almost daily (Figure 3). If we define more frequent use as higher than the median frequency in the sample (which is at least once a month) then 28.4% of the students use their cards more frequently (at least once a week). More than 50% of students with credit cards carry an unpaid balance of less than $1,000 and, at the same time, a smaller proportion use their cards more frequently. This may again suggest that student credit card use is slightly more prevalent for borrowing purposes than transaction purposes.
Students were also asked for what types of spending they use their credit cards. On average, students responded that 26% of their credit card spending is used to make ends meet (food, clothing, transportation, etc.) while 20% is utilized for convenience. Only 11% is used for spur-of the-moment buying—a possible signal for irresponsible debt behavior. A larger proportion of spending that students use credit cards for include spending for emergencies, special occasions, and for making ends meet, which may all fall under the category of using credit cards for borrowing. These results again point to a slightly higher use of credit cards as a borrowing medium, but also to a responsible use and management of credit card debt (Figure 4).
Most students surveyed have a good understanding of the issues involved in the use and management of credit card debt. Forty-six percent said they had extensive knowledge on how to manage their credit card debt. More importantly, an overwhelming majority (72.5%) reported they have an extensive understanding of the consequences of misusing their cards, including having a bad credit record and bankruptcy. A majority (62.8%) also said had an extensive knowledge of how much their debt will ultimately cost them (Table 9).
Perhaps more important than just the knowledge and understanding of credit card debt is how this translates into actual behavior, in terms of holding lower unpaid balances. Of the three issues presented above, only the level of knowledge and understanding on the first issue—how to manage credit card debt— had a statistically significant effect on the amount of balances held. Table 10 illustrates students with extensive knowledge and understanding on how to manage credit card debt have statistically significant lower unpaid balances than students with moderate knowledge and understanding.
In addition to credit card debt, another major source of debt for students is student loans to help them finance their education. There is concern about the burden of debt that students accrue even before starting full-time employment. For students reporting positive balances on their credit card, it is interesting to see how much debt burden is added if we combine their student loans as well.
Table 11 presents the distribution of student loan amounts among students with different levels of credit card debt, providing a general picture of the overall debt burden of students at FHSU. The Chi-squared test to evaluate if the distribution of credit card debt is related to student loan amounts indicate that it is (i2 stat = 70.97 and p-value = 0.002).
About 77% of students with unpaid balances on their credit cards are burdened with student loans as well, although more than half (61%) have student loans under $11,000. Students were also asked how much they agree with the statement ‘borrowing money for a university education is a good investment’: 60.2% agree while 34.2% strongly agree.
A summary of the relevant variables from the survey is presented below:
- Sixty-eight percent of students surveyed (undergraduate and graduate) hold at least one general purpose credit card.
- More than a third (38.2%) acquired their first credit card before college and credit card ownership increases with student academic class level.
- Students reported APR interest on card balances and pre-approved solicitations through mail as the more important factors influencing their decision to get credit cards.
- Students hold an average of 2.78 cards, with 31% of them reporting holding only one card.
- The average unpaid balance is $1,532 for those who reported positive balances. 32% reported zero unpaid balance when the survey was conducted and more than half the students carried balances less than $1,000.
- More than half (55.5%) indicated that they pay their full balance every month.
- On average, 26% of the student’s credit card spending is used to make ends meet while 20% is utilized for convenience.
- About 77% of students with unpaid balances on their credit cards have student loans as well.
The majority of FHSU students have credit cards and reported unpaid balances indicating that credit cards are used to facilitate borrowing slightly more than for transactions for convenience. The relevant policy issue is for what proportion of students are credit cards helpful, and for what proportion are they a liability. About 73% of students with unpaid balances have unpaid balances of less than $1,000. More than half reported paying off balances every month and only about 1% reported not being able to pay the minimum balance. Only 2% experienced a rejection on a credit line increase request within the last year, generally a reflection of good credit standing. Moreover, students who claim extensive knowledge of how to manage their debt had significantly lower balances. These results suggest responsible management of credit card debt by students, with credit cards being more of a help (to pay for emergencies and special occasions, to make ends meet, and for convenience) than a liability (only 11% reported using credit cards for spur-of the-moment buying, a possible signal of irresponsible debt behavior). Improving the financial literacy of students may reinforce responsible behavior. Particular attention should be given to the consequences of getting into credit card debt, since survey results indicate there does not seem to be a significant relationship between the students’ knowledge and understanding of the consequences of misusing debt, how much the debt will ultimately cost them, and the level of balances held.
In terms of the overall debt burden of students at FHSU, only about a quarter of the students with unpaid balances on their credit cards are not burdened with student loans as well, although more than half of those carrying student loans owe less than $11,000. This may be perceived as a relatively hopeful situation for the students and university officials, as well.
1. Underlying relationships that seem to emerge from these cross tabulations should be treated with caution as this does not necessarily imply causation. To test for causal relationship of credit card debt to demographic, economic, and attitude variables, consider results from the paper “Modeling Credit Card Borrowing by Students” by Arano and Parker (2006) which uses the same data set.
2. Report from the Docking Institute of Public Affairs, Fort Hays State University.
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Norvilitis, J.M., and P.S. Maria, “Credit Card Debt on College Campuses: Causes, Consequences, and Solutions,” College Student Journal (2002).
Manning, R., Hearing on “The Importance of Financial Literacy among College Students,” U.S. Senate Committee on Banking, Housing, and Urban Affairs (September 2002).
Min, I., and J-H. Kim, “Modeling Credit Card Borrowing: A Comparison of Type I and Type II Tobit Approaches,” Southern Economic Journal, Vol. 70, No. 1 (2003), pp. 128-143.
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Kathleen Arano is Assistant Professor in the Department of Economics and Finance at Fort Hays State University, Hays, Kansas.