Do students need credit cards?

Sep 29, 2011 – 2:48 PM ET
| Last Updated: Sep 29, 2011 3:52 PM ET

By Jay Bryan

Josh is stressed out. With good reason.

The 26 year-old Concordia University undergraduate is struggling to manage $24,000 in credit card debt, cover his day-to-day expenses and keep up with his full-time studies. Until he qualified for a student loan this month, he was forced to work full time just to earn enough money to pay his minimum credit card payments and service another $16,000 in debt from a line of credit.

“The last year was very stressful,� he said. “I wasn’t able to achieve the grades I wanted to because I had so much stress from having to work so hard.�

Unfortunately, Josh’s story is not an unusual one on Canadian university campuses.

More than ever before, students have easy access to credit cards and lines of credit – often with very high spending limits. If used responsibly, credit instruments are a convenient payment method that can be used to build a healthy credit history, which can be helpful to a young adult hoping to buy a house or make other major purchases down the road.

But many students fail to do so.

Josh, who did not want his last name revealed for privacy reasons, obtained his first credit card at the age of 18. A student in Edmonton at the time, he was earning good wages working part time at a credit card company. Over the next few years, he spent freely and quickly racked up thousands of dollars in debt on four credit cards. Instead of putting on the brakes, the financial institutions that issued the cards raised his spending limits even though he was only in his early 20s – one card’s limit was hiked to $11,000 – and gave him the line of credit. It was a nice lifestyle. Until he was unexpectedly laid off.

Suddenly, Josh found himself scrambling to meet his debt obligations.

“Because I worked for a credit card company in Edmonton, I was very conscious of credit and credit scores and unfortunately the situation went downhill,� he said.

Josh figured he could save some money by moving to Montreal, which has a lower cost of living than Edmonton, to continue his studies. But his financial situation actually worsened when the Quebec government did not recognize him as an independent student and deemed him ineligible for its student loan program. He ended up pursing his studies and used credit to cover the funding shortfall for his education and living expenses.

Working and receiving some financial help from his parents has enabled him to get his debts somewhat under control – even though half of his monthly income now goes toward making his minimum payments – and he hopes to pay off his debts within the next 10 years.

But he worries that access to easy credit is enabling other students to wind up in the same situation.

“I found that (banks) were very happy to offer all of this money not realizing that a student’s situation can change,� he said. “There were no relief programs in any way. Or not that I was aware of.�

The substantial cost of post-secondary education today is stressful for many students. Adding credit card debt to the equation makes it even worse.

Last month, a TD Canada Trust student financial study found that 58 per cent of Canada’s post-secondary students aged 18 to 24 are worried about money. Sixty-four per cent of the students surveyed expect to graduate with debt, and one quarter of them anticipate owing in excess of $25,000. Yet 47 per cent of the students surveyed said the most convenient way to pay for day-to-day expenses is with a credit card. The students said their main discretionary expenses were transportation, eating out and technology.

Such worrisome survey results prompt the question: Do students really need credit cards?

In many cases, possessing a credit card is “a necessary evil,� said Brenda Shanahan, director of McGill’s New Residence Hall student dormitory.

A banker turned social worker, Shanahan lectures in the university’s school of social work where she is completing a PhD on how young adults can acquire healthy financial behaviour. She also runs financial management workshops for students.

Many parents like to give their adult children, especially those studying away from home, a credit card to use as an emergency source of funds, she said. Having a credit card also enables students to shop online – where some of the best discounts for textbooks and school supplies can be found – and where they can go to buy items like iTunes songs and plane tickets.

“You’re a non-person in the electronic marketplace if you don’t have a credit card,� she said.

The problem, Shanahan said, is learning how to use a credit card properly. And it’s even harder when students are living in a society that promotes a culture of indebtedness. Many parents don’t use credit wisely themselves and are not in a position to teach financial literacy to their children, she said.

Richard Haggins, manager of education at Mississauga, Ont.-based debt counselling firm InCharge Canada, which operates as SOS

Dettes in Quebec, agreed.

All of this is compounded by the easy availability of credit and aggressive marketing on the part of credit card firms targeting students, he said.

“Today’s youth are much more prone than their grandparents to wind up getting into debt issues as credit is more available.�

Thirty years ago, Haggins said, it was unthinkable that a bank would give a credit card to an 18-year-old with no income. Graduating students were sometimes able to get credit cards but they usually had $500 spending limits – not $5,000. Today, students can fill out application forms that are practically pre-approved, he said. Moreover, he added, many credit card companies market their products to freshmen during university orientation weeks by offering them gifts – such as sweatshirts – if they apply for cards.

A spokesperson for Canada’s main bankers’ association defended industry practices in an interview and denied irresponsibility in providing credit cards with high limits to students who have virtually no income.

“A credit card can be a good tool for students as long as they use it responsibly and don’t get themselves into debt,� Canadian Bankers Association spokesperson Maura Drew-Lytle said.

She said banks determine student credit limits on a case-by-case basis and that a student has the option of asking for a lower limit on his or her card. Ultimately, she added, it is a student’s responsibility to learn how to manage a credit card properly.

“They have to make sure they are ready for a credit card if they want one,� Drew-Lytle said.

But are banks doing enough to educate students about proper credit card use?

“Yes,� she said, adding that banks and her association provide educational resources for post-secondary students online about budgeting and the proper use of credit cards. Drew-Lytle said her organization also offers a financial education seminar to high school students.

Regardless, critics say that in order to learn how to deal with the onslaught of credit offers, students need to start taking academic courses about the fundamentals of personal finance in high school.

“I believe that there are some schools that introduce these kinds of things, but they tend to focus on investing in the stock market,� Shanahan said. “That’s fun. But I’d like to see more depth than that. I don’t want to encourage gambling on the stock market. I’m talking about life skills.�

Haggins said teaching financial literacy should start in the early teens – before young people have developed consumer behaviours.

“The earlier you get to people, the better it is going to wind up,� he said.

Middle- and upper-class students living at home and working part time are especially prone to developing what the industry calls “premature affluence,� Haggins added. Since they usually don’t have to pay for their living expenses, most of their income is used for discretionary purposes. This often leads to developing a taste for luxuries such as expensive coffee and clothing.

But when these young people move out to attend school, they suddenly find that their income barely covers their basic expenses – let alone luxuries.

“They don’t want to start living like a pauper, but their income barely covers the necessities of life,� Haggins explained. “But they have credit cards and they can put luxuries on the credit cards and then make the minimum payments. They are able to go out and they are able to enjoy things.�

He characterized the minimum payment system as “a big trap� that encourages consumers to hold on to debt to create profit for credit card companies. Often, he said, the hammer drops once a student graduates and student loan payments kick in six months later.

While some young adults realize they need to cut back on expenses and start paying off their debts, others keep spending and put the items they can’t really afford on their credit cards, he said.

Haggins said it would better for students if financial institutions gave them credit cards “with training wheels� – cards that would give them a low limit for the first year or so, which would enable them to gradually build up their limits and, one would hope, learn how to control their spending habits, he said.

“But to right out of the gate give them a credit card with a $5,000 limit – that’s asking for trouble,� Haggins said.

As for Josh, he thinks that students shouldn’t be blocked from having credit cards because they are needed to build a personal credit history.

“But stick to one,� he said. “Don’t take those extra offers.�

He called his experience a “life lesson.�

With the exception of his student loan, he said, “anything I spend now is the money I make. I don’t live on credit anymore.�