Credit Cards September 4, 2007, 12:01AM EST

Majoring in Credit-Card Debt

Aggressive on-campus marketing by credit-card companies is coming under fire. What should be done to educate students about the dangers of plastic?

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Credit Cards on Campus: A BusinessWeek series examining the increasing use of credit cards by college students

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This story is the first in a series examining the increasing use of credit cards by college students.

Seth Woodworth stood paralyzed by fear in his parents' driveway in Moses Lake, Wash. It was two years ago, during his sophomore year at Central Washington University, and on this visit, he was bringing home far more than laundry. He was carrying more than $3,000 in credit-card debt. "I was pretty terrified of listening to my voice mail because of all the messages about the money I owed," says Woodworth. He did get some help from his parents but still had to drop out of school to pay down his debts.

Over the next month, as 17 million college students flood the nation's campuses, they will be greeted by swarms of credit-card marketers. Frisbees, T-shirts, and even iPods will be used as enticements to sign up, and marketing on the Web will reinforce the message. Many kids will go for it. Some 75% of college students have credit cards now, up from 67% in 1998. Just a generation earlier, a credit card on campus was a great rarity.

For many of the students now, the cards they get will simply be an easier way to pay for groceries or books, with no long-term negative consequences. But for Seth Woodworth and a growing number like him, easy access to credit will lead to spending beyond their means and debts that will compromise their futures. The freshman 15, a fleshy souvenir of beer and late-night pizza, is now taking on a new meaning, with some freshman racking up more than $15,000 in credit-card debt before they can legally drink. "It's astonishing to me to see college students coming out of school with staggering amounts of debt and credit scores so abominable that they couldn't rent a car," says Representative Louise Slaughter (D-N.Y.).

Congressional Oversight Weighed

The role of credit-card companies in helping to build these mountains of debt is coming under great scrutiny. Critics say that as the companies compete for this important growth market, they offer credit lines far out of proportion to students' financial means, reaching $10,000 or more for youngsters without jobs. The cards often come with little or no financial education, leaving some unsophisticated students with no idea what their obligations will be. Then when students build up balances on their cards, they find themselves trapped in a maze of jargon and baffling fees, with annual interest rates shooting up to more than 30%. "No industry in America is more deserving of oversight by Congress," says Travis Plunkett, legislative director for Consumer Federation of America, a consumer advocacy group.

The oversight may be coming soon. With Democrats in control of Congress and the debt problems for college kids only growing worse, the chances of a crackdown have increased substantially. The Senate is expected to hold hearings on the credit-card industry's practices this fall. Representative Barney Frank (D-Mass.) has pledged to introduce tough legislation. And Slaughter introduced a bill in August to limit the amount of credit that could be extended to students to 20% of their income or $500 if their parents co-sign for the card.

The major credit-card companies take great issue with the criticisms. Bank of America (BAC), Citibank (C), JPMorgan Chase (JPM), American Express (AXP), and others say they are providing a valuable service to students and they work hard to ensure that their credit cards are used responsibly. Citibank and JPMorgan both offer extensive financial literacy materials for college students. Citibank, for instance, says it distributed more than 5 million credit-education pieces to students, parents, and administrators last year for free. At JPMorgan Chase, bank representative Paul Hartwick says: "Our overall approach toward college students is to help them build good financial habits and a credit history that prepares them for a lifetime of successful credit use."

Questions About the Vetting Process

The banks also make the point that students have to be responsible for their own actions. They are the ones, after all, who sign up for cards and then choose to use them. The banks argue that they have to act like responsible parents, keeping credit cards out of the hands of students who are clamoring for them. A spokesman for Bank of America says that it denies half of the students who apply for cards.

But the experiences of Woodworth and other students raise questions about the rigorousness of the vetting process for getting a credit card. Ryan Rhoades, who graduated from the University of Pittsburgh last year with more than $13,000 of debt, remembers his credit-card company's employees telling him not to worry about being unemployed. Lukasz Kozoil, formerly a student at DePaul University, says that Citibank's representatives told him to fill in his tuition on a card application where it asked for income. (A spokesman for Citibank says, "no representative from Citi is authorized to fill in tuition cost on a credit-card application.") Woodworth got his American Express card without a job, and it had a credit limit of $6,000. "Within three months, they upped it to $10,000," he says.