Student Credit Cards: Useful or a Trap?

At a hearing on credit card practices affecting college students, Democratic Rep. Carolyn Maloney of New York, chair of the House Financial Services Subcommittee on Financial Institutions and Consumer Credit, last week asked Benjamin Lawsky, special assistant to New York State Attorney General Andrew Cuomo, to tell what his office's investigations had uncovered.

Lawsky began by warning the committee that he could not disclose much. While Cuomo's investigations had found "highly lucrative" and "somewhat secret" agreements between credit card companies and colleges that allowed the companies to market on their campuses, the bulk of the investigation would need to remain secret until an unspecified future date.

But Lawsky was willing to compare the agreements to the under-the-table deals where lenders paid schools or financial aid officers in exchange for placement on schools' preferred lender lists. Credit card marketing, he said, included using peer pressure to get students to sign up for cards, giving away gifts, and paying for affinity arrangements that allowed card providers to cobrand cards with schools.

Brett Thurman, undergraduate student government president at the University of Illinois-Chicago, shared his own food-for-credit story. A credit card representative offered him a coupon for a Subway sandwich, but when he got to the Subway (located near campus), another representative told him that he would have to fill out a form first. When he asked if applying for the card would hurt his credit report, Thurman says that the representative told him it would not—which is probably incorrect. Applications for credit are reported to credit bureaus, and just applying for a new credit card can have a negative impact on credit scores.

In an attempt to counteract the credit industry-bashing, Kenneth Clayton, managing director and general counsel at the American Bankers Association, pointed out in his testimony that only 35 percent of college students carry balances on their cards, and most handle their credit cards responsibly. Access to credit enables students to fly home for the holidays or get help in emergencies, he added.

The committee soon entered into the debate currently rocking the personal finance world: Do consumers just need to be better educated, or are financial products themselves the problem? The banking industry usually argues that financial literacy is the solution to unmanageable consumer debt, while consumer advocates say the financial world needs to be easier for consumers to understand and navigate. As Christine Lindstrom, higher education project director at U.S. Public Interest Research Group, put it, "The products are poisonous."

As soon as she uttered those words, Rep. Judy Biggert, an Illinois Republican and ranking minority member of the subcommittee, jumped in and gave the floor to Clayton, who gave Biggert the answer she was looking for: The solution, Clayton said, is to empower and educate consumers.

But Rep. Mel Watt, a North Carolina Democrat, wasn't satisfied with that answer. Watts himself receives so-called convenience checks—checks from his credit card company that he never asked for and, if cashed, would carry a high interest rate—in the mail, and it makes him mad. Did Clayton think convenience checks are an appropriate practice?

"I am not prepared to respond," says Clayton, before adding that for some people, convenience checks may, indeed, be convenient.