You Gotta Give 'Em Credit

Mention the word "credit" and most college students worry about having enough to graduate. Yet, with around 84 percent of Harvard students carrying credit cards, perhaps they should reach for their wallets instead of their course guides.

The large number of college credit cardholders is indicative of aggressive marketing by companies such as American Express, MasterCard and Visa. Not only do many of these companies waive minimum income requirements, they also offer incentives aimed at college students.

By broadening the scope of their marketing, they have won over many college students who will likely become loyal customers.

The business of buying on credit first captured the national limelight in 1938 when oil companies' customers created accounts to simplify transactions.

And since the creation of the first credit card--the Diners' Club Inc. in 1950--it has exploded into a multi-billion dollar industry that will involve approximately 87.5 million American cardholders by the year 2000, according to Statistical Abstract of the U.S.

But the credit card craze is not limited to credit card companies like American Express, MasterCard and Visa. Retail, oil and phone companies have created their line of credit cards for customers.

In 1989 according to the Nilson Report, 82.1 million people owned credit cards from oil companies, 103.6 million held accounts with phone companies and 95.4 million carried credit cards from retail stores.

And the market for new credit cardholders is engulfing more and more college students each day.

American Express, founded in 1958, has aggressively pursued the college market since the 1979 creation of its student marketing department. It is the credit card company that offers the most incentives intended to woo college students into the world of credit.

In addition to waiving the usual minimum income requirements of $25,000, American Express accepts unusual sources of income when granting accounts to students. Because students do not ordinarily work during the academic year, the company accepts funds such as scholarships, loans, work-study and allowances from parents as verifiable sources of income, says Director of Student Marketing Diane Ty.

Other benefits include four round-trip tickets on Continental Airlines costing less than $100 each way and free subscriptions to the money management magazine Connections geared specifically towards college students.

American Express also offers up to 30 minutes each month of free long-distance calling from MCI and special discounts to various merchants and retailers.

Just recently, the credit company signed a deal with J. Crew in which college card holders can get a discount of up to $20 on purchases of $100 or more.

Although American Express would not disclose what percentage of their business centers on college students, Ty says they approach the college market with the aim to recruit long-term customers.

"Students often go on to become some of our best and most loyal customers," Ty says.

American Express' apparent success in attracting college students has not, however, dissuaded banks from also competing for the college market.

Banks such as BayBank Systems Incorporated, CitiBank, Chase Manhattan and Nations Bank also offer incentives to woo college students to open MasterCard and Visa accounts.

BayBank, which started soliciting students only four years ago, entered the market with the sole purpose of recruiting long-term customers, according to Jim M. Cosman, president of BayBank Systems credit corp.

Cosman says that, although the student market composes a small percentage of total credit customers, BayBank decided to take advantage of its fall recruiting of college student checking accounts to appeal to potential new credit cardholders.

Not only does it waive the minimum income requirements, BayBank created a special $500 credit line in place of the usual $1000 minimum to make the accounts more accessible to students.

"We make a distinction between college students and everyone else, so we offer something to students that is not offered to everybody else," Cosman says.

The president of the credit corp. says because BayBank does not want to penalize college students who do not have a regular source of income and thus risk losing future customers, the bank accepts parents and "other questionable sources" as guarantee for payment.

"We always look at our business on terms of profit for our stockholders, and we felt that students pay us as well or better than our general customers," Cosman adds.

To help ensure that BayBank will retain their college cardholders after graduation, Cosman says that they arrange consultation appointments about increasing credit lines to coincide with the time of a student's graduation.

Several college credit cardholders interviewed say they opened accounts to take advantage of these perks, especially the bargain-priced plane tickets.

Elissa L. Gootman '95 of Matthews Hall, says the cheaper tickets are "the only reason" she is willing to pay the American Express $55 annual fee.

Other students say what drew them to buying on credit was the many uses for the card. They order by phone from mail order catalogs and have convenient access to money. In addition, they can establish credit histories, since credit companies waive minimum income requirements.

"Hopefully having a good credit history will make it easier to get loans in the future," says Franco M. Baseggio '92 of Leverett House.

For still others, the challenge of managing their money attracted them to open credit card accounts. They say keeping up-to-date on monthly payments is good practice for dealing with more significant future financial transactions, such as securing loans and buying cars and houses.

"Having a credit card gives me a much better perspective on how to keep track of my money and makes me more conscientious of how I spend it," says Justin N. King '95 of Holworthy Hall.

But there is a dark side to buying on credit, as some students have found. Lured by the ease of buying on credit, some students said they underestimated the serious responsibility involved with owning credit cards. So from negligence or lack of funds, they drown in the quicksand of time and money.

Kathleen M. Flaherty, a first-year Harvard Law School student, got her first credit card right before college for emergency money at the insistence of her father and today carries a collection of cards, including two Visas.

Yet, as a result of her commitments to pay several different credit card companies, Flaherty said she has fallen into "very deep debt," which has tainted her credit record and almost jeopardized her efforts to secure student loans for law school.

Looking back on her situation, Flaherty says she would not recommend credit cards to anyone and that she thinks the credit industry's systems for payment disguise the amount of money cardholders really pay.

"I think it's very seductive and if you're just paying $20 per month you don't realize how much you're actually paying until you get into trouble," Flaherty says.

To prevent such cases from becoming the norm, credit card companies say they have instituted several safeguards.

American Express requires that customers pay their bills in full each month, says Ty. This measure keeps students not only from accumulating interest on their payments but also protects them from establishing poor credit histories.

Ty says a poor credit record can remain on file for up to seven years, affecting the ability to secure future student, car and house loans.

With BayBank, card privileges can be revoked if customers fail to pay their bills one day past due. Yet, it hesitates to do so because the bank understands the college student's precarious financial existence.

"This is a bunch of people who've made an effort to get into school and are embarking on the time to get credit," says Cosman.

In addition, BayBank charges interest on unpaid bills, which earns the bank profits. But the company does not make a lot of money from the interest charges, according to Cosman, and would prefer that customers not abuse their cards in this manner.

But several students say they do not believe these safeguards are adequate. They say they are afraid of spending money that they either do not have or really cannot afford to spend.

"For right now, I'd rather have no credit record than have a bad credit record," says Rosalie R. O'Brien '95 of Wigglesworth, adding "I'm sure I'd just buy all kinds of things without funds to back them."