LEARNING THE HARD WAY: FUTURE-ORIENTED COLLEGE STUDENTS AMASS MORE CREDIT CARD DEBT

FAYETTEVILLE, Ark. — College students that plan ahead accumulate more credit card debt than more spontaneous, live-for-the-moment students, according to University of Arkansas researcher Norma A. Mendoza.

Mendoza, assistant professor of marketing and transportation in the Sam M. Walton College of Business, studies the debt and savings behavior patterns of college students. She and Ph.D. student Hélène Cherrier co-authored a study that was presented on May 31 at the American Marketing Association's Marketing and Public Policy Conference 2001 in Washington D.C.

"Most people believe that credit card debt is caused by impulse spending or a lack of self control," Mendoza explained. "But our research shows that students with a strong future orientation actually depend more on credit cards than students with an orientation to the present."

Accumulation of credit card debt by college students has become an issue nationwide. Students are acquiring and using credit cards at a greater rate than ever before. USA Today recently reported that undergraduate credit card usage rose from 67 percent in 1998 to 78 percent in 2000, with 32 percent having four or more cards.

The undergraduates sampled in Mendoza's study had a median age of 20, with ages ranging from 17 to 65, 47 percent were male and 53 percent female.  The average credit card balance was $2,300, and the maximum number of credit cards held was nine.

The students were given a questionnaire to acquire demographic and financial information and determine their temporal orientation, the degree to which they focus on the present versus the future. Students were also asked to answer questions about their values, such as materialism. Contrary to the argument that a present orientation leads to credit card overuse, Mendoza found that those students with a stronger future orientation tended to use more credit cards and to have higher number of credit cards with revolving balances.

Mendoza also expected to find that students who relied more on credit to finance their current spending would have a high debt-to-income ratio.  This was not the case. Mendoza explained that credit card companies are luring young consumers by requiring them to pay only the minimum payment, usually 2 percent of the balance.  So even though students are carrying a large debt burden, they don't perceive it as problematic because it is not a significant portion of their income. 

"Unfortunately, this approach leads students to carry debt for longer time periods and to pay more in interest rates," said Mendoza. "Students may borrow money to be able to achieve consumption levels they would otherwise be unable to achieve with their current income."

The problem is that even though college students understand the nature of debt, they have unrealistic expectations about their ability to repay. Their decisions to spend now may be driven by a future financial outlook that includes "drastically improved earnings."

It is also possible that students with a future orientation don’t look far enough into the future to take advantage of it, Mendoza points out. And students may not have enough information to gauge the impact of debt and the problems it can cause in the workplace and family.

An employee with credit problems may be unable to use a credit card to travel on business and be forced to explain the situation to an employer. Or an unsuspecting fiancee may find herself married to, and responsible for, a huge credit card debt. Credit card debt is especially problematic given the recent changes in bankruptcy law that require all debts to be paid off, according to Mendoza.

The problem is not limited to college students, however. Mendoza explained that credit card companies are increasingly targeting high school students. Some researchers have found that patterns of compulsive buying begin in adolescence.

"This is important for consumer protection efforts because we know that college students are being targeted by credit card companies," Mendoza said. "If students are responding differently from other populations, then we may need to be giving them different information about the problems associated with credit card debt or approaching the subject in different ways."