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OK, I'm a fuddy-duddy, but I couldn't figure out why these companies were even interested in pushing credit cards to kids who were fairly likely to be unemployed (the lucky ones) or only marginally employed (if they were working their way through college). A kid eating pizza across from me had to explain that the companies were counting on the student's parents to make good if their kids overspent. Wow. My parents would never have done that. (And my kids know better than to count on my help!)
But the credit card companies apparently had done their research and determined that marketing credit cards to kids away from home for the first time was a good way to build a future revenue base.
Of course, most kids would use them responsibly, but those that went overboard presumably either had parents who wouldn't want to see their kid's credit rating besmirched, or would eventually have a well-paying job that would cover their minimum payment for years and years and years. Perfect customers in the credit card companies' eyes.
Even if parents don't bail them out (and, really, they shouldn't!), this target market was tempting because of its high potential for securing a long-term revenue stream. If I were a soulless credit card marketing executive, I'd go after them, too. College students (speaking generally, of course) tend to be inexperienced in financial matters and still have that adorably cocky attitude that says, "Hey, I can handle it."
Credit card companies are not in business just to make it easier to pay bills. They do a rather nice job of that and are compensated by the merchants who pay them a small fee for each transaction plus a percentage of the transaction.
But the real money comes from interest payments. In fact, those interest payments have been so lucrative than the high rates have come down considerably in recent years. As long as your credit is good, it's not difficult to get a permanent rate below 12% if you ask around, and of course, there are the "low introductory rates."
In an article a few weeks ago, I mentioned that I switched the one credit card balance I carry (left over from that foray into the halls of academia) from one card to another to take advantage of those low introductory rates. Several readers wrote in to tell me that that wasn't such a good idea. Apparently the number of accounts you open and close is factored into your credit rating so that someone who may be applying for a car or mortgage loan could find themselves in for an unpleasant surprise. I suspect that this factor alone wouldn't torpedo anyone's mortgage application, but if there were any other stains on your record, too....
It looks like, once you run up a balance, you just can't win. You pay the high interest until you pay the card off, or you get penalized, one way or the other.
It's no wonder that so many people are absolutely furious with credit card companies. I've gotten a lot of mail as a result of that earlier column and I've also been reading the entries to our Get Out of Debt contest. One theme comes through loud and clear: anger at the companies.
Yes, most of the people I've heard from acknowledge that they are responsible for their actions and some have gone to absolutely heroic measures to pay off their debts, but there is considerable resentment at the way credit is marketed.
One the one hand, there is personal responsibility. Yes, you charged that trip to Aruba and, even though it rained the entire time, you have to pay for it. I am firmly on the side of personal responsibility.
But there is the other hand. Just how much responsibility do the companies bear for marketing their product as though it were the most natural thing in the world to jet off to Jamaica for a week with no thought about the cost?
Discover seems to be the only company that shows any conscience in its marketing. Remember that cute ad about the kid going off to college with a credit card to be used for "emergencies." Pizza IS an emergency in college!
Discover has a website area specifically designed to educate students about credit cards. I give them a lot of credit (giggle) for that. If the Visa or American Express websites have such information, it is not prominently displayed. MasterCard has a somewhat anemic attempt at educating students. But mostly that message is lost under a barrage of "Click here to apply" links.
Tomorrow I will be sharing with you some of the voluble and articulate mail I have received on this issue. Boy, did it push some hot buttons!
Fool on and prosper!