Student card survey: Offers fewer but more generous
Michelle Crouch
Five years after a credit card reform law designed to protect young adults went into effect, college students have significantly fewer credit card options to choose from, according to a CreditCards.com analysis of student card offerings.
However, the student credit cards on the market now offer better terms, on average, than those that were marketed before the Credit CARD Act regulations on young adults went into effect in February 2010, the analysis shows. While the regulations drove some issuers out of the market, others beefed up their offerings to appeal to a generation that is cautious about credit.
Lower rates, more benefits Data on rates compiled weekly by CreditCards.com using a sample of the most popular cards show the average student card interest rate has plummeted, from about 16 percent before regulation to 13.4 percent today.
The student card average is also almost 2 percentage points lower than the national average, according to the data. That's notable because before the CARD Act, student cards consistently had some of the highest rates compared to other types of cards.
Many of the most popular student cards today also offer other benefits, CreditCards.com found, including tools to help students learn about credit, rewards and error forgiveness. One card, the Discover It Chrome for Students, even gives students cash back for good grades.
"Because they're more restricted post-regulation, financial institutions have had to create more attractive features and rates to appeal to younger customers," said Rohit Chopra, senior fellow at the Center For American Progress and former student loan ombudsman at the Consumer Financial Protection Bureau. "Student credit cards may now be loss leaders. The banks that are offering these cards are trying to build a long-term relationship with an educated consumer."
Effects of the CARD Act Before the CARD Act, credit card issuers were ubiquitous on college campuses, handing out T-shirts, food and other freebies to students who filled out credit card applications. Young people signed up in droves, and many inevitably ended up deep in debt, becoming long-term sources of interest and fees for financial institutions.
The CARD Act effectively killed that business model. It sharply restricted marketing on college campuses, banned giveaways in exchange for applications and prohibited preapproved offers to people younger than 21. The act also made it tougher for young adults to qualify for a card, requiring them to have to have a source of income or a co-signer.
"The student credit card market became a lot tougher, post-regulation," said Alex Johnson, senior analyst in the credit advisory service at Mercator Advisory Group. "The new regulations added cost, and a lot of issuers were not willing to invest in revamping their programs, so they dropped their products or significantly scaled them back. The ones that decided to stay made an explicit choice. They view these cards as more of a strategic priority."
Since regulation, two of the largest card issuers, American Express and Chase, have stopped offering student cards altogether. Others consolidated their options.
And while it's not scientific, a look at the number of student cards marketed on the CreditCards.com site before and after regulation offers an indication of the scale of the reduction. In 2007, before the CARD Act went into effect, 13 student credit cards were marketed on the site. Today, there are just four.
Wooing students who are wary of credit In addition to increased regulation, banks trying to entice college students face another challenge: Young people who are wary of credit. Many college students saw firsthand how the financial crisis devastated their parents. They've also had to take on more student debt than previous generations and may be reluctant to dig a deeper hole. As a result, they have increasingly turned to debit and prepaid cards, said Moshe Orenbuch, a card industry analyst with Credit Suisse Group AG bank.
In 2013, just 30 percent of college students owned credit cards, a drop from 42 percent in 2010, according to "How America Pays for College," a study by the student lender Sallie Mae. And two-thirds of college students said in a different survey they feared credit card debt, according to a 2014 U.S. Government Accountability Office report.
To woo those students, issuers have added features designed to help students feel more comfortable with credit, Orenbuch and other experts said. The CreditCards.com analysis found:
Almost all student cards (9 of 11) tout tools to help students learn to use credit wisely, such as free credit monitoring, mobile account alerts, budget and planning tools, financial literacy videos or charts that track spending.
Seven of the 11 have no penalty APR, meaning they won't raise a cardholder's interest rate for missing payments. That's important since young cardholders are prone to financial mistakes. A 2012 study by the Federal Reserve Bank of Richmond found that cardholders under 21 were more likely to experience minor delinquencies (30 to 60 days past due), but less likely to experience more serious delinquencies than older cardholders.
Two cards have tools specifically designed to help students learn to pay on time. The Capital One Journey card rewards students for paying on time each month by giving them an extra 0.25 percent cash back. And the Discover It Chrome for Students waives your first late payment fee.
Christine Lindstrom, higher education program director at U.S. Public Interest Research Group, said student complaints about credit cards have dropped dramatically since the CARD Act went into effect. "Before, we had students calling in all the time about their tactics," she said, noting that campus debit cards have become a bigger problem. "I don't think I've gotten a complaint about credit cards since 2008."
Johnson said he's seen a shift in the way financial institutions think about college-age customers: "They've realized that encouraging consumers to take on irresponsible amounts of credit is a short-term path to profitability, but in the long term it ends up harming the industry and creating the need for regulation like the CARD Act."
Instead, he said, issuers are focusing on creating customers who are using credit products responsibly and who will remain loyal as their income grows. "The theory is that in five or 10 years, a lot of these students will be prime, very profitable customers," he said.
Other findings about student cards For its analysis, CreditCards.com reviewed 11 of the most popular student cards in the U.S. market in August 2015 and examined historic data from the CreditCards.com weekly credit card rate report, which uses a representative sampling of 100 of the most popular cards in the U.S. Information was gathered from the cards' terms and conditions documents and calls to issuers. One card -- a Visa College Rewards product offered by Elan Financial Services -- is co-branded by several different banks including Comerica, East West Bank and Bremer; it was counted just once in the analysis.
The analysis found:
Most offer a range of rates based on creditworthiness. All but two of the student cards publish a range of APRs depending on the applicant's credit score. The lowest possible is 10.99 percent offered by the BankAmericard Credit Card for Students. CreditCards.com typically uses the lower range of published rates to calculate average rates. Using the midpoint of each card's range, the average APR for all student cards would rise to 17.4 percent.
About two-thirds of the surveyed cards (6 of 11) promote a 0-percent introductory APR offer. The introductory periods range from six to 12 months, and the average length of an offer is 9.3 months.
Nine of 11 offer some sort of rewards. Better rewards mean worse rates. As with other types of cards, the student cards with better rewards programs generally have higher interest rates. It makes sense to choose a card for its rewards only if you pay the full balance on the card each month.
Four of 11 offer 0-percent balance transfer deals. The BankAmericard Credit Card for Students is the most generous, with an 18-month term.
Three of 11 offer bonuses linked to spending in the first three months. Two Bank of America cards offer a bonus worth $100 for spending $500, while the Citi card offers Thank You Points worth about $25 for spending $500. However, experts say such incentives can be risky because they may encourage students to spend more than they can afford.
Choosing a card If you're shopping for a student card, it's important to consider how you're going to use the card. If you plan to rely on it to pay off large purchases -- say your laptop melts down or you need an expensive car repair -- your top priority should be a low APR. If you're confident you will be able to pay off the card on time every month, then you can focus on rewards. And if you are already carrying debt, consider the cards with 0 percent balance transfer promotions.
Also, keep in mind other options exist beyond student cards, experts said. If you're planning to use the card to cover educational expenses such as books, you may be able to get a federal student loan at a much lower rate. And don't rule out cards not specifically marketed for students, especially those offered by your local credit union or community bank. "They often have low interest rates or special deals for students on a local campus," Chopra said.
If you're having trouble qualifying for a student credit card, consider a secured card.
No matter which card you choose, make sure you sign up for online banking and mobile alerts to stay on top of your account, said Linda Sherry, director of national priorities for Consumer Action, a Washington, D.C.-based advocacy group. "When you're a young user, charges have a way of mushrooming during the month," she said. "Often, that's what gets young people into trouble."
