Undergraduates are keeping smaller balances on their credit cards – at $2,169 – than at any time since 1998, according to a new study by student loan originator Nellie Mae.
Nellie Mae's study analyzed credit card behavior of Nellie Mae student loan applicants over the last year, following up on three previous studies done in 1998, 2000 and 2001. In a statement, Marie O'Malley, vice president of marketing, called college students and credit cards “a dangerous combination,” even though credit card usage seems to be leveling off.
The study showed, for example, that 76 percent of undergraduates in 2004 began the school year with credit cards, an 8 percent drop from 2001. The average outstanding balance in 2001 was $2,327, but in 2004 that figure dropped by 7 percent.
The top reason for using credit cards is for charging school supplies, according to 74 percent of undergrads in the survey. The second most common use for the cards was a tie between textbooks and food. Some students are even using their cards for tuition, Nellie Mae reports. Less than 24 percent use credit cards for this purpose, but the company calls it “disconcerting” nonetheless, as the average variable credit card interest rate is about 13 percent.
Nellie Mae, a subsidiary of Sallie Mae, the nation's biggest provider of education funding, says the deferment options, low interest rates and repayment incentives make student loans “a much wiser financing choice” than credit cards.
Credit card companies offer no repayment incentives. In fact, paying only the minimum payment sometimes is not enough to cover the accrued interest, so the outstanding balance can actually go up over time.
Minimum payments are about to increase to prevent this from happening, at the orders of the Office of the Comptroller of the Currency, part of the Treasury Department, the South Florida Sun-Sentinel reported.
Citibank, MBNA and Bank of America are among the companies that have raised, or soon will increase, their minimum payments. For a student with a $2,000 balance, minimum payments would go from $40 to $80.
Paying only the minimum amount due usually isn't enough to pay off the debt, said Norma Garcia, a senior attorney with the Consumers Union, the nonprofit publisher of Consumer Reports.
"What does the minimum balance take care of? In most cases it's not much," Garcia told the newspaper.
Nellie Mae said it's important to educate college students about making smart spending and borrowing decisions. "The key to financial health for students during school and after graduation is being aware of what they borrow, when they borrow, and how much they borrow, and understanding the costs and responsibilities associated with all types of borrowing, including credit cards," O'Malley said.