A Crash Course in Credit Woes : Finances: Students inexperienced at dealing with charge cards often find themselves in trouble. A nonprofit group in Tustin helps them dig themselves out.
Most young people are just out of high school or college when they receive their first credit card. Having that plastic with their name embossed on it in their wallet somehow makes them feel like an adult, a card-carrying member of consumer America.
Remember how powerful, how mature you felt when you walked into Nordstrom and paid for hundreds of dollars’ worth of merchandise with only a signature?
The motto was: “Don’t go anywhere without it.”
Just ask 22-year-old Gicell Hernandez of La Habra.
At 18, she hit the jackpot, receiving Visas from Citibank and Chase.
“The first day I had my credit cards, I called my friend and said, ‘We have to go to the mall,’ ” she said. “I was so excited because I didn’t have any money. But when the bills came, I thought, ‘What the hell did I do?’ ”
Laureen Ferguson can relate. Three years ago, she ran up $5,000 of debt almost as fast as you can say ca-ching! The 21-year-old Mission Viejo resident is reminded of this every month, when she writes a $122 check and hands it over to the Consumer Credit Counseling Service of Orange County, in Tustin, the local office of a long-established national nonprofit organization that offers free financial counseling, and for a fee based on a sliding scale (up to $20 a month), will negotiate with creditors and devise a debt repayment schedule. The service disperses Ferguson’s payment to her creditors.
Like Hernandez, Ferguson got her first card right out of high school, when she was approved for instant credit at the Broadway.
“It shouldn’t have been so easy,” Ferguson said.
Credit card issuers make it simple by design: They want to develop brand loyalty with the consumer as early as possible. An estimated 61% of the nation’s 8 million college students have at least one credit card, according to Bankcard Holders of America, a nonprofit consumer education organization based in Virginia.
“College students with no job, no assets, no income, no credit history and no means of supporting themselves are eligible for unsecured credit and, in some cases, quite a bit of credit,” Bankcard Holders Executive Director Ruth Susswein told a congressional subcommittee meeting on consumer credit and insurance last year.
Even a Citibank Visa ad marketed to students includes the line, “Students don’t need a job or co-signer,” to apply. Why?
Well, college students are a good risk. According to Jim Frannea, president of Orange County’s Consumer Credit Counseling, 97% of college students who are issued cards will pay their debts.
Another enticement to card issuers? It’s estimated that teen-agers spend more than $93 billion a year.
“The credit industry has loosened up their guidelines for young people in the last five years,” said Frannea. That’s why many major-card issuers--such as American Express, whose representatives visit Cal State Fullerton, UC Irvine and Chapman University--solicit on campus, often offering giveaway products to entice applicants.
You’ll get no argument from Ken Gordon, American Express’ vice president of student marketing. He isn’t shy about his company’s efforts: “American Express has always found the college market to be important. It was the first card (to be solicited) on college campuses 15 years ago. We found students to be very credit-worthy, as much or more so than the general population. And it’s important to gain early loyalty in the American Express franchise.”
Gordon said that American Express has “a fairly sophisticated model that will tell us who should and shouldn’t be extended credit,” including class standing and a credit check. But, he said, the applicant’s income isn’t a factor.
Which is probably why Ferguson, as an $800-a-month receptionist, procured five additional accounts within months of receiving her first card.
Having moved away from home and into an apartment with her then-boyfriend, buying on credit was a convenient way to set up house.
“I maxed my Sears card within two days,” she said. “I was just happy I was getting a lot of stuff; I wasn’t really thinking about the interest that was building up then, but it’s all hitting me now.”
Soon after, Ferguson was laid off and broke up with her boyfriend, who had also used her cards. Although he left her to foot the bills, he did leave a nice set of tools that sits, unused, in her parents’ garage.
Ferguson moved back to her parents’ to cut expenses, but those $15-a-month minimum payments that had been no problem went unpaid for nine months. She dodged the barrage of phone calls and letters from collection agencies and creditors. Several creditors threatened court action, and she considered bankruptcy.
“I felt like I had no hope in getting them paid off,” she said.
Her parents steered her toward Consumer Credit Counseling. It contacted Ferguson’s creditors and arranged a repayment plan that worked within her budget. After her ledger is clear in three years, the organization will help her re-establish her credit.
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Hernandez blames the Volkswagen Rabbit From Hell for most of the $6,500 of debt she accumulated over two years. Her 40-mile commute from Hacienda Heights to Yorba Linda to her job took its toll on her ’84 car, and she maxed out two Visas to keep it running. Then it needed tires, “and I got a Sears card.” Followed by engine trouble, “and I got a Firestone card.”
No matter. The Rabbit still died in 1992, and she bought a new car, resulting in $312 more in monthly payments. Coupled with living on her own, “it was all too much,” Hernandez said. “I couldn’t handle it. I’d fall behind one and catch up with another.”
She too is working with Consumer Credit Counseling, enabling her to write a single check for the nine credit cards on which she owes.
The average age of Frannea’s clients is 33, but that’s dropping fast, he said.
“We’ve been seeing a lot of very young clients--college age, or just out of college, young people with two or three credit cards and debt in amounts between $8,000 and $10,000,” he said.
Typically, Frannea said, a young adult’s debt is accumulated through tuition, living expenses, and entertainment.
“We are also seeing a lot of young people who have jobs at lower-income levels than they anticipated coming out of school and are unable to meet their financial responsibility,” he said. “They’re not understanding the long-term effects of credit cards and student loans.”
Another factor among young people, Frannea said, is their need for instant gratification. They want the world, and they want it now.
“Young people want the same things as their parents, who acquired their things over 20 or 30 years,” he said, “but they want them within two or three years.”
Kids can’t be totally blamed for this one, said Frannea.
Material possessions rate high on the self-esteem scale in the United States, so young people are just doing what they’re conditioned to do, said Frannea.
“Compulsive spending is a problem in our society,” Frannea said. “People often don’t recognize that they don’t have a need for the things they purchase. Credit cards are an addiction like any other addiction.”
And credit card issuers have long been willing to feed that addiction without warning about the nasty side effects, but that may be changing. Visa and MasterCard have produced educational brochures, and American Express is distributing a video, “Credit Ready?,” to high schools.
Taking it a step further, the Bankcard Holders of America proposed mandatory “credit education”--that all junior high and middle schools require a basic personal finance class--in congressional hearings.
“To allow student access to credit before requiring them to learn the responsibilities of managing credit is financial suicide,” Susswein, of Bankcard Holders, told the House subcommittee. “We don’t hand out driver’s licenses, then hope that someday students will learn to drive. Why dish out unsecured credit and then hope students can handle it?”
Frannea said children should be learning about fiscal responsibility as early as the fifth and sixth grades.
“They’re already spenders, with allowances and jobs,” he said. “You need to teach about savings and interest.”
In the meantime, some young consumers will continue to learn the hard way.
“I learned my lesson,” said Ferguson, who is in no rush to return to the plastic. “I pay cash now.”
