Scholarly Article
amadanResearchers and educators are increasingly interested in how college students finance their education, as students are relying on student loans and credit cards more than ever before. Using a sample of 1,244 students, the present study analyzes the credit card habits and purchase patterns of college students, differentiating those that are considered financially at-risk (FAR) from those who are not financially at-risk (NFAR). Results of a series of independent sample t-tests suggest that FAR students use their cards with greater frequency for a variety of different purchases (both necessities and non-necessities). FAR students also engage in less responsible behaviors based on a measure of credit card use. These findings provide insights into how FAR students become FAR, and may suggest avenues for more targeted intervention in the future.
College students are relying on student loans and credit card debt more than ever before. A variety of forces are impacting their reliance including tightening credit, a sluggish economy, and the continuing rise in the price of college. For example, recent information from The College Board (2009) shows that for private not-for-profit colleges, the weighted average cost of tuition, fees, and room and board has risen to $35,636. At public four-year colleges, the inflation-adjusted average tuition and fees for in-state students has increased 35% since 2001; the largest increase for any five year period since data began to be collected 30 years ago (College Board, 2009). To pay for the escalating cost of college, students are required to carry greater amounts of debt. In 2009, two-thirds of college students borrowed to pay for college, carrying an average debt load of $23,186 by the time of graduation (Chaker, 2009). These numbers are in striking comparison to only over a decade earlier when 58% of students borrowed to pay for college, with a far lower debt load of $13,172 (Chaker, 2009).To acquire an education today, the end result is that many undergraduates find themselves stuck in a "debt to diploma" system (Draut, 2005).
The related pressures of credit card debt intensify the consequences of student loan borrowing and may compromise students' ability to complete their degree. College students today have grown up in a world of plastic, seeing credit as a way of life. According to Sallie Mae's National Study of Usage Rates and Trends (2009), 84% of undergraduates have a credit card, and the average number of cards carried per cardholder is 4.6. In addition, the average undergraduate carries over three thousand dollars in credit card debt, the highest level since the company began collecting data in 1998 (Sallie Mae, 2009). Credit card debt levels of this magnitude suggest that many college students use credit cards as a source of "short-term revolving credit," being called "installment users" (Danes and Hira, 1990, p. 225). Previous research has identified different types of credit-card users: convenience users and installment users (Mathews and Slocum, 1969; Slocum and Mathews, 1970; Mansfield, Pinto, and Parente, 2003). Convenience users utilize the credit card as a substitute for cash and pay the balance in full each month (Danes and Hira, 1990; Mansfield et al., 2003). Installment users carry a monthly balance and range from mild debtors to serious debtors (Lea, Webley, and Walker, 1995; Pinto, Mansfield, and Parente, 2004).
There is a downside to using credit cards as a source of installment debt. Student credit card debts and student loans often consume all the disposable income of many young graduates just starting in the work force. Financial experts estimate that nearly half of all students who graduate from college have an "unmanageable debt burden" with repayments exceeding 8% of their monthly income (Zaff, 2004). According to Draut (2005), "The rise in credit card debt combined with massive student loan debt means that 25 cents of every dollar of income goes to paying off debt.. .The explosion in credit card debt is linked to the earnings crisis hitting young adults" (p. 12). Further concerns have been raised regarding the impact of increasing debt burdens on whether or not students are able to complete their degree, often called student persistence behavior (Pinto, Parente, and Palmer, 2001). Recent research by Robb, Moody, and Abdel-Ghany (2011) suggested that financial factors (e.g. credit card use behavior, student loan debt, and the presence of other forms of debt) play a significant role in student persistence behavior as well as in student perceptions of debt.
Despite these problematic figures, it is important to acknowledge that not all college students carry high levels of debt or mismanage credit. In fact, findings suggest that the majority of students use their credit cards responsibly (Lyons, 2004). However, previous research has identified a group of college students who have been called "financially at-risk" (FAR) based on their chronic mismanagement or misuse of their credit cards. The purpose of this study is to explore whether or not FAR students differ significantly from non-financially at-risk (NFAR) students in terms of their credit card use behaviors. Examining specific spending behaviors should provide some insight into how FAR students become FAR. Further, credit cards may effectively serve as a proxy for other forms of consumer debt, giving us a general sense of how FAR students might behave in other domains of financial decision-making.
High rates of credit card possession are documented across numerous studies of college students (Manning and Kirshak, 2005; Nellie Mae, 2002; 2005, Sallie Mae, 2009), and the question of how students use their cards has received some attention in the prior literature. Roberts and Jones (2001) developed a 12-item scale of credit card use that indicated the degree to which students use their cards responsibly. These authors used the scale to analyze compulsive buying behavior among college students, with the idea that credit card use might have a moderating effect on the relationship between money attitudes and compulsive buying.
Earlier research suggested that credit cards may serve as spending stimuli, encouraging individuals to spend more than they would if a credit card was not available (Feinberg, 1986; Ritzer, 1995). Research by Roberts and Jones (2001) supported these findings, suggesting that credit card usage served as a mediator in many cases. Specifically, the research indicated that greater credit card use was associated with a stronger relationship between money attitudes and compulsive buying behavior, demonstrating a facilitating effect on the part of credit cards (Roberts and Jones, 2001).
Research also documents the types of products and services consumers purchase with their cards. There has been considerable discussion on whether or not college students use credit cards primarily for need-based expenses or to fund their lifestyle (Pinto, Parente, and Palmer, 2000). Sallie Mae (2009) reported both need-based and non-necessity types of purchases. Ninety-two percent of undergraduates reported using credit cards to pay for some type of college expense (e.g., textbooks, school supplies, commuting costs). The other top expenses purchased on credit cards included: food (84%), clothing (70%), and cosmetics (69%).
Earlier data supports Sallie Mae's findings. Information presented by the Government Accountability Office (GAO, 2001) suggested that credit cards were primarily being used to purchase books and supplies for school, food, and clothing. Some respondents, however, reported entertainment expenses as well. These findings were reinforced by survey research from Louisiana State University in which students reported using their credit cards to finance necessities such as clothing (75%), food (71%), and tuition, books, or supplies related to their education (70%), as well as auto related expenses (75%) and non-necessities such as entertainment (50%) (Lawrence et al., 2003).
One caveat to the discussion on how consumers use credit cards is the distinction between luxury items (or sometimes called "extras") versus necessities. According to Schor (1998) Americans' definition of what constitutes a "need" has clearly changed from generation to generation. Modern day consumerism has changed what we "want" into what we "need." For example, Pinto et al. (2000) reported on focus group data in which college students commented that they do not use credit cards to spend money on luxuries, but rather only purchase necessities. However, when asked to name their purchases, responses included numerous "non-necessities items" such as, going out to restaurants and bars, going on vacation, shopping for new fashions, and purchasing electronics and gifts.
College costs rose dramatically over the past decade (College Board, 2009), and available assistance for students is increasingly in the form of student loans, which must be repaid, rather than grants (Baum, 2003). Available evidence suggests that increases in family income, loans and grants failed to keep pace with increasing college costs (College Board, 2005; Heller and Marin, 2002), indicating that students may be forced to seek out alternative forms of financial support to cover education expenses. Credit cards are more available to college students, and researchers have considered how credit card use might influence student persistence to degree and attitudes towards debt (Schemo, 2002).
Previous studies of persistence behavior recognized the significance of several socio-demographic and academic factors such as student background, GPA, gender, race/ethnicity, and campus integration/involvement (Cabrera, Nora, and Castaneda, 1992; Haynes, 2008; Spady, 1970; Tinto, 1993). Many recent studies expanded upon this research by considered the role of relevant financial factors as well, including financial aid and parental income in a model of student persistence behavior (Bradburn, 2002; Braunstein, McGrath, and Pescatrice, 2001; McElroy, 2005; Nora, Barlow, and Crisp, 2006; Reynolds and Weagley, 2003; Wohlgemuth, Whalen, Sullivan, Nading, Shelley, and Wang, 2007). Previous studies in the area of consumer debt (viewed separately from student loan debt) indicated that credit card debt and student loan debt are positively correlated (Pinto and Mansfield, 2006), though the nature of this relationship has not been explored in detail.
The influence of consumer debt on persistence was explored indirectly by Pinto et al. (2001). The researchers studied the relationship between credit card usage, student employment, and academic performance. Surveying over 1000 students from three campuses in the Northeast, they divided their sample into high versus low academic performer categories (based on GPA) and evaluated the differences between the groups in terms of credit card usage (number of cards and total outstanding balance), hours of employment, students' perceived need for employment and students' anxiety toward credit card usage. Their findings revealed specific differences with regard to how the two groups perceived credit cards impacting their college performance. The low academic performer group indicated that their main reason for employment was to pay off their credit cards. The high performer group reported higher levels of anxiety about credit than the low academic performer group.
More recent research explored the relationship between consumer debt and persistence more directly. Robb et al. (2011) indicated a significant relationship between self-reported credit card use behavior and student perceptions of debt and reported persistence behavior. Students who reported less responsible credit card use were more likely to indicate that the emotional burden of their student loan debt would make it difficult to persist, and the same results were noted for consumer debt. Further, less responsible credit card use was associated with a greater likelihood of students reducing their credit hours or dropping out for financial reasons. These findings suggest that misuse of credit cards may be problematic from the standpoint of college student persistence, as irresponsible, or "at-risk" behaviors add to an already significant financial burden.
Financially At-Risk College Students
Lyons (2004) classified college students as "financially at-risk" if they met one or more of the following characteristics:
1. Have credit card balances of $1,000 or more,
2. Are delinquent on their credit card payments by two months or more,
3. Have reached the limit on their credit cards, and
4. Only pay off their credit card balances some of the time or never.
Lyons (2004) found that FAR students were more likely to be female, black, and/or Hispanic, and financially independent. Further, FAR students were more likely to receive need-based financial aid, to hold $1000 or more in other debt, or to have acquired cards through the mail, at a retail store, or on campus. Work by Grable and Joo (2006) supported these findings, as African American students held greater levels of debt, and debt was further related to negative financial behaviors and stress.
The size of this "at-risk" group of college students has also been examined to determine if it represents a significant proportion of college student credit card users. Lyons (2004) found that 37% of the 835 graduate and undergraduate students surveyed at the University of Illinois met the criteria for financially-at-risk. Pinto and Mansfield (2006) extended the work of Lyons (2004) by including data on student loan debt and prioritization of debt repayment with information on credit cards. They surveyed undergraduates at eight four-year institutions (four public and four private) in the eastern half of the United States. In their study, they found that 14% of students from their final sample of 1,441 students met the financially-at-risk profile. Results from their analysis suggested that FAR students held higher student loan balances, and indicated that they would give priority to the repayment of credit card debt over student loan debt (Pinto and Mansfield, 2006). While the actual percentage of financially at-risk college students (FAR) varies by institution, there is no question that it represents a significant proportion of college student credit card users.
This earlier research provides a clear differentiation between FAR and NFAR students in terms of demographic and financial factors, but does not address the question of how FAR students differ from NFAR students in terms of spending and attitudes towards debt (which may provide some insight into how students actually become FAR). With respect to how FAR students actually become FAR, there are two potential factors to consider. First, FAR students may be less responsible than other students, and their at-risk status is the result of their irresponsible financial behavior. Second, FAR students may be as responsible as other students, but face resource constraints that force them to rely more on credit cards out of necessity rather than desire.
The present study extends the work of Lyons (2004) and Pinto and Mansfield (2006) by studying the differences between FAR students and NFAR students in how they use their credit cards. It also incorporates a measure of credit card use and general purchase behaviors into the analysis, while considering potential implications for college student persistence to degree. Whereas previous analyses have examined the characteristics of FAR students, and provided some insight into how they differ from non-FAR students in terms of income and debt, little is known about how FAR students differ from NFAR students in terms of general credit card use. "Such an investigation would allow us to determine what proportion of students are using their cards for convenience (e.g. to earn airline miles or other reward points) versus those that are using them because of genuine financial need (i.e., they have no other source of funds)" (Pinto and Mansfield, 2006, p. 30). The goal of this analysis is to understand more about how FAR students become financially at-risk. That is, do they generally rely on credit cards to assist with necessary expenditures (such as education expenditures) or are they using credit cards for expenditures that are less necessary (such as entertainment or eating out)? Examining self-report data on credit card use and purchasing behavior should provide some insight into the relative responsibility of their behavior.
The primary research question of this study is: Do FAR students differ significantly from NFAR students in terms of their overall reported credit card spending patterns? In addition, several sub-questions are proposed:
• Are FAR students using credit cards to cover "necessary" expenditures (e.g. food, clothing, living expenses, education, car maintenance and gas) with greater frequency than NFAR students?
• Are FAR students using credit cards to cover "unnecessary" expenditures (e.g. eating out, entertainment, travel, and electronics) with greater frequency than NFAR students?
• How different are FAR students from NFAR students in terms of risky credit card use?
An online survey was e-mailed to the current student population of two major universities, one in the Southeast (student body of approximately 22,000) and one in the Midwest (student body of approximately 25,000), during the Spring 2007 semester. A total of 3,008 usable surveys were obtained (a response rate of roughly 12%). Each respondent completed an 83-question survey covering a variety of demographic and personal financial issues. The sample was restricted to students under the age of 25 in the hopes of capturing a more representative sample of traditional students in the United States, resulting in a usable sample of 2,197 college students (FinAid, 2010; LAO, 2009). This sample was further restricted to focus on those students who reported holding credit cards (n = 1,244). Demographic characteristics for the reduced sample roughly mirrored the existing student populations with the exception that a larger proportion of the sample was female relative to the actual student population (68% versus 52.5%) and a larger proportion of students were upperclassmen. Demographics for the sample are presented in Table 1.
Similar to research by Pinto and Mansfield (2006), the present study defines students as being Financially At-Risk (FAR) if they display any one of the following three behaviors: 1) having at least one credit card at the limit, 2) making only the minimum payment on their credit cards, or 3) carrying a credit card balance equal to or greater than $1,000. All other students are considered to be Non-Financially At-Risk (NFAR). Of the 1,244 students analyzed, slightly less than one-third (31%) are classified as being financially at-risk. Student risk behaviors are broken down by type in Table 2. FAR students are distributed fairly evenly across the different risk behaviors, though a larger proportion note carrying a balance of $1,000 or greater.
TABLE: Table 1: Descriptive Statistics for the Entire Sample (N = 1,244)
Table 1: Descriptive Statistics for the Entire Sample (N = 1,244)
TABLE: Table 2: Student Risk Behaviors by Type (N = 1,244)
Table 2: Student Risk Behaviors by Type (N = 1,244)
Variable Frequency Percent Have at least one credit card at the limit 210 17% Make only the minimum payment 179 14% Carry a credit card balance equal to or greater than $1,000 226 18% Students classified as financially at-risk (met one or more of the above criteria) 383 31%
The credit card use scale developed by Roberts and Jones (2001) is used to analyze the degree to which students report engaging in risky credit card use behavior (see Appendix). Items from the scale are summed to create a composite use score. The internal consistency (alpha = .83) of the credit card use measure is quite good for the present sample, and is similar to that demonstrated by Roberts and Jones (2001; alpha = .81). Higher scores on the composite measure indicate more responsible (less risky) credit card use behavior while lower scores indicate less responsible (riskier) credit card use behaviors.
During the course of the survey, students were asked to respond to the question, "What do you usually purchase with your credit cards? (Check all that apply)", with a corresponding list of eighteen potential categories of spending behavior (i.e. eating out, entertainment, clothing, emergency expenses, etc.). Purchase behavior is further explored by the addition of two questions. The first question asked students whether they ever charged school items (i.e. textbooks, tuition, fees) because student financial aid was insufficient to cover the costs. The second question asks students whether they use their financial aid to pay their credit card bills.
Independent sample t-tests are used to analyze the main research question: do FAR students differ significantly from NFAR students in terms of their overall reported credit card spending patterns? (See Table 3) Looking at the entire sample, students display a mean credit card use score on the composite measure of 46.8 out of 60. When the sample is divided into FAR versus NFAR students, FAR students display a significantly lower score on the composite measure (38.8 versus 50.4; t = 26.31, p < .001), indicating less responsible credit card use overall from FAR students. In terms of specific spending behaviors, FAR students report greater use of cards across the board (that is, a larger proportion of FAR students indicate engaging in many of the spending behaviors analyzed). Among those behaviors where differences proved to be statistically significant, FAR students display greater spending in every category except for use of credit cards for emergency purposes only.
A greater proportion of FAR students reported using credit cards to pay for tuition and fees (20% versus 12%; t = 3.60, p < .001), clothing or accessories (78% versus 59%; t = 6.55, p < .001), eating out (67% versus 48%; t = 6.29, p < .001), auto expenditures (75% versus 64%; t = 3.93, p < .001), textbooks and school supplies (47% versus 40%; t = 2.17, p < .05), cosmetics or personal items (40% versus 27%; t = 4.57, p < .001), electronic equipment (27% versus 20%; t = 2.57, p < .05), furniture (18% versus 12%;t = 2.80,p< .01), travel (42% versus 28%; t = 4.71,p < .001), groceries (57% versus 44%; t = 4.19, p < .001), entertainment (42.5% versus 32%; t = 3.76, p < .001), and living expenses (including internet and cell phone; 20% versus 11%; t = 4.36, p < .001). FAR students were not statistically different from NFAR students in terms of expenditures for computers and related items, Greek involvement, general books, media purchases, or other expenditures.
The data suggest that a greater proportion of FAR students report charging school items on their credit cards due to insufficient support from financial aid (46% versus 25%; t = 7.62, p < .001). Similar results were noted for the question of whether students use their financial aid to make payments on their credit cards (27% versus 8%; t = 9.1 l,p<.001).
TABLE: Table 3: Breakdown of Credit Card Use Behaviors (N = 1,244; FAR versus NFAR):
Table 3: Breakdown of Credit Card Use Behaviors (N = 1,244; FAR versus NFAR):
Variable Overall NFAR FAR T-Statistics Tuition and Fees 183(15%) 106(12%) 77 (20%) 3.60*** Clothing/Accessories 805 (65%) 507 (59%) 298 (78%) 6.55*** Eating Out 668 (54%) 412(48%) 256 (67%) 6.29*** Computer and Related Expenses 247 (20%) 160(19%) 87 (23%) 1.69 Car Expenses (gas/maintenance) 842 (68%) 553 (64%) 289 (75%) 3.93*** Greek Expenses 56 (4.5%) 40 (5%) 16 (4%) 0.37 Textbooks/Supplies 528 (42%) 348 (40%) 180(47%) 2.17* Cosmetics/Personal 389(31%) 235 (27%) 154(40%) 4.57*** Electronic Equipment 275 (22%) 173(20%) 102(27%) 2.57* Furniture 173 (14%) 104(12%) 69(18%) 2.80** Travel Expenses 404 (32%) 244 (28%) 160(42%) 4.71*** Emergency Only 218(17.5%) 168(19.5%) 50(13%) -2.77** Books (general) 191 (15%) 130(15%) 61 (16%) 0.37 Groceries 598 (48%) 380 (44%) 218(57%) 4.19*** Videos/DVDs/CDs 288 (23%) 190(22%) 98 (26%) 1.36 Entertainment Expenses 435 (35%) 272 (32%) 163 (42.5%) 3.76*** Rent/Utilities/Cable/ Internet/Cell Phone 174(14%) 96(11%) 78 (20%) 4.36*** Other 55 (4%) 43 (5%) 12 (3%) -1.47 Charge School Items? 389(31%) 213(25%) 176(46%) 7.62*** Pay With Financial Aid? 173(14%) 70 (8%) 103 (27%) 9.11*** Continuous Mean (Std Dev) Mean (Std Dev) Mean (Std Dev) Credit Card Use Score± 46.84 (8.96) 50.41 (6.55) 38.81 (8.42) 26.31*** * p < .05, ** p < .01, *** p < .001 ± Higher scores correspond to more responsible credit card use
The primary objective of this study was to examine the credit card spending habits of FAR students. A secondary goal was to determine whether or not FAR students differ significantly from NFAR students in how they use their credit cards. Our findings suggest that FAR students appear to use credit cards with greater frequency in a variety of different spending categories. For example, significantly larger percentages of FAR students reported using credit cards for clothing, eating out, and travel, but a larger percentage of FAR students also reported using credit cards to cover tuition, groceries, and auto expenses. These results alone are not surprising given that more FAR students come from low to middle-income households and report being financially independent. However, if the greater credit card use among FAR students were simply need driven, it might be expected that differences would only exist among necessary expenditures, which is not the case. The data show a greater reliance on debt among FAR students. They use credit cards more often than NFAR students to fuel their lifestyles with expenditures such as eating out, going on vacation, and buying clothing and cosmetics.
Not only do FAR students use credit cards with greater frequency, they also engage in riskier credit card use behaviors relative to NFAR students. The data indicate that when compared to NFAR students, FAR students more often: 1) make only the minimum payment on their cards; 2) make delinquent payments; 3) go over their credit limit; 4) use their credit card(s) for installment purchases; and 5) use their credit cards for cash advances. Each of these risky behaviors contributes to higher costs of borrowing, unnecessary fees, rate increases, and greater likelihood of future financial difficulties for college students. Previous research suggests that growing financial burdens may have an adverse impact of student's persistence to degree (Lyons, 2008; Robb et al., 2011). College students are already faced with significant costs associated with obtaining a degree, an issue that can be exacerbated by irresponsible credit card use. Many students may underestimate the extent to which credit card debt may be a factor in later life decisions such as purchasing a home or automobile. The results are also supportive of previous findings suggesting that many FAR students face a form of "double jeopardy" when it comes to education expenses (Pinto and Mansfield, 2006). Students who are FAR indicate using cards due to the insufficiency of financial aid and also report using financial aid money to cover their personal debts.
The results should be considered carefully as there are several limitations that impact the generalizability of the present findings. All data are self-reported and there is potential for sampling bias. As the survey was e-mailed to the general student population as a whole, respondents may be those students who are more inclined to care about the subject matter or the incentive (chance to win a mall gift certificate). Further, the sample collection occurred at one point in time at two major (though regionally different) state institutions.
Aside from practical concerns over excessive credit card debt and potential impacts on later life decisions and persistence to degree behavior, it is important to consider what these data might suggest about students' other financial behaviors. That is, does credit card use behavior provide us with some insight into how these consumers will handle other financial instruments later in life?
Previous studies have provided insight into what types of students are more likely to be financially at-risk. Results from the present study increase our understanding of this group by looking at specific credit card use behavior and spending decisions. These data combined provide administrators and educators with a greater understanding of FAR students, and may be a useful starting point in terms of targeted interventions in the future. Whereas the present analysis is limited to credit card use behavior, to the extent that this behavior serves as a proxy for other financial decisions later in life, understanding this information may be crucial to understanding how FAR students may be expected to behave after college. Further, how college students use their credit cards has a significant impact on their long-term financial well-being as credit scores may be used by lenders, insurers, and employers.