College students are finally beginning to learn just how dangerous credit cards can be.
About 76 percent of undergraduates started the 2004 school year with at least one card, which is an 8-point drop from the start of the 2001 school year, according to a recently released study by Nellie Mae.
Still, that doesn't mean students are giving up on making their payments in plastic form just yet. According to the study, undergrads still have an average of four cards in use.
The decision some students are making not to resort to borrowing against a credit card for their purchases is being influenced by new bankruptcy laws, decreases in banks' willingness to give out cards and more overall knowledge about the risks and benefits of credit cards.
Also, Congress recently changed the rules about how people can file for bankruptcy, and that will make it more difficult for some people to do so, according to some economists. The changes were approved in April but won't take effect until October.
These new laws could be why college students are beginning to be more responsible with their use of credit cards, Cecil Bohanon, professor of economics, said.
Although students are most likely not worried about the changes, parents might be making sure that their sons and daughters aren't out creating debt for themselves, Srinivasan Sundaram, associate professor of finance and insurance, said.
It's not just the possible punishments that are convincing students to spend less, though. It's also the lack of availability of credit cards because smaller banks are becoming less wiling to give a card to someone -- especially a college student -- for the first time, Sundaram said.
Not only are banks being more strict, but there is also a lot of merging between companies and banks, so instead of two cards, consumers only have the chance to have one, Manoj Athavale, associate professor of finance, said.
The ease at which students can get certain cards also affects how many they have; for instance, American Express does a lot of advertising, but it is a very tough card to get, Sundaram said, and there are others that are just as difficult to qualify for.
Annual fees and prepaid cards are also reasons that not as many students have cards, Athavale said.
"If you have $200, you want to keep it with you and not put it on a prepaid card," he said.
But just because fewer students have credit cards now doesn't mean all students are being completely responsible with them.
Only one out of five students who use credit cards pays their entire balances every month, according the Nellie Mae study. Almost half of students pay the minimum balance or more but still carry a balance over to the next month, and one in 10 students pays less than the minimum payment.
Banks don't make money from those who pay the full balance. They make their money from those who pay the minimum, but those who don't pay anything can affect the economy by living above their means without paying for it, Sundaram said.
It all comes back to being responsible and knowing the interest rates on the cards, because they are just like a loan, and payments must be made for the interest as well as the balance, he said.
"I had a card with a 25 percent rate, until I realized it was that high, so I immediately canceled it and cut it into pieces," Ball State senior Alonso Miller said.
Miller tries not to use his cards but has been using them recently on small, necessary purchases until he starts working again and can pay off his balances. It's not worth the risk to have high interest rates and an outstanding balance, he said.
Although Miller didn't need to learn from someone else's mistakes, that lesson could be why fewer students are using credit cards.
"It could be like the little brother-big brother effect with drug addiction," Bohanon said. If a young sibling sees the effects of addiction on an older family member, the younger one doesn't want to be like that, which might keep the sibling away from drugs. Something similar could be happening with credit card risks, Bohanon said.
"A lot of college students crashed and burned and had $5,000 to $10,000 in debt as a sophomore in college, so those in school now could be trying to avoid that," Bohanon said.
But whether it's self-taught or learned through the mistakes of others, these lessons are important for everyone -- not just students -- to learn. Everyone should know how to be financially responsible, so that they aren't paying off debts their whole lives, Sundaram said, and having a credit card can be a good thing, as long as it is used responsibly.
Building credit and having a card are essential when renting a car, getting a reasonable lease on a car or getting a high limit on that card, all of which show that the owner used the card responsibly, Bohanon said.
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