More and more college students are making their first foray into the world of credit card debt. However, managing that debt is a strong precursor to their future management of student loans and overall financial health. The cause of more college students applying for credit cards is hotly debated. Likely reasons include aggressive marketing, emergencies, general spending habits, and access to financial literacy. This work discusses the average student’s credit card debt, the cause of the debt, credit management, and the long-term effects of college student credit cards. To a lesser degree, this work will also discuss why more students are opening credit products. And what this suggests about economic trends.
The average college student has approximately $3,100¹ in credit card debt. And this number is on the rise considering the significant increase from the prior average of approx $2,300¹. 84% of modern college students have credit cards². Additionally, most college students with a credit card report a 620 credit score. Several studies have revealed that credit card debt, at or above the average balance, contributes to higher academic and financial stress rates.
Furthermore, these factors lead to higher dropout rates. The exact interest rate for a student credit card varies. However, based on reports that approx 51% of student credit cards don’t have rewards³, and the general financial knowledge that rewardless credit cards have higher rates, we can safely assume that most student cards have mid to high-interest rates. This means that one of the most financially unstable demographics is being charged higher rates than its wealthier counterparts.
Granted, people with poor credit are known to pay higher rates on credit. Many college students depend on their credit for immediate emergencies and general living. This occurs due to the limited working hours available to college students (although the number of working students is also rising.) However, 20 or more working hours contribute to higher stress, declining academic performance, and, ironically, more financial woes.²
Average College Student’s Credit Card Debt by Grade Level
Does it get better or worse from freshman to senior year?
On average, seniors hold more credit card debt than first-year students. The cause is a mix between higher living expenses and their habit of carrying credit balances. Another factor is that seniors can access higher credit card limits and multiple cards. Freshmen carry approximately $1,500 in credit card debt, almost doubling over four years. By senior year the average credit card debt is $2,800.³
Of the college students with credit cards, only 33% report using them solely for emergencies.³ Little research has been done on students who have credit cards and drop out. Whether or not their money management skills change is unknown.³
How College Students Pay Their Credit Card Bills
Credit cards are unique because paying them doesn’t automatically reduce one’s spendable money. For example, paying $100 on an electric bill means the money can’t be repurposed. But paying $100 on a credit card means one can still access the funds for food, bills, etc. For this reason and the penalty of interest charges, making minimum payments is generally a poor idea. However, a majority of college students that work and attend school full time only make minimum payments. For perspective, the average student credit card debt is approximately $3,100. It would take years to pay the balance to zero if only the minimum payment were satisfied.³
However, 47% of college students report that their parents paid their credit card bills at least once. 13% of college students admit to frequently relying on parents to pay credit and other bills. Therein lies a small margin of college students who have never paid or infrequently pay any of their own bills. While the value of a parental safety net is well understood, relying entirely on parents can foster poor money habits and credit management in the long term.³
That said, 49% of students report paying their balance off in full every month. And approx 36% report paying more than the minimum.³
Most Common Spending Categories According to Credit Card Data
What college students spend their money on is a big part of why many carry balances over. Furthermore, their exact spending habits are worth billions to major corporations. As mentioned in the abstract, credit companies disproportionately target college students due to their high levels of brand loyalty, ability to influence and create trends, and how much they spend vs. their older counterparts. Because of this, many credit companies have exclusive contracts with colleges to advertise on campus. The sign-up process is surprisingly easy, and, for college students with little to no credit, the approval rates are high, as is the average interest.⁴
Another major factor in student credit card balances is tuition. Many students use their cards to pay their tuition. Colleges, in turn, charge a percentage-based fee to process credit cards. Here’s the exact breakdown of the different spending habits of college students.
The following data is pulled from a study at Louisiana State University.
- 68% of credit balances are due to tuition, books, and school-related expenses.³
- 75% of balances are for clothes.³
- 74% of balances are from auto repairs.³
- 71% of balances are for food.³
These numbers are pulled directly from the study based on reported trends, revolving balances, and student reporting. The numbers exceed 100 because of these factors. Other major expense categories include travel and electronics unrelated to school work.
Other Interesting Data Points About College Student Credit Card Debt
- Students without credit card debt have up to 70k in loans and other debt.⁴
- The average debt after school is 20,000⁴
- Undergraduates owe approx twice that at 39,000.⁴
- Full-time students have over 60 billion in buying power.⁵
- Credit card debt led to 120,000 students declaring bankruptcy in 2000.
What College Students Can Do To Avoid and Manage Credit Card Debt
There are a few things college students can do to take control of their finances. Read our guide on building credit for college students for more tips.
Avoid Running Your Credit
Every time credit is run, it’s negatively impacted. Each hard credit check deducts 3-5 points from a credit score. But, since credit is based on brackets, 3-5 points isn’t a lot. However, having multiple credit checks in a short amount of time causes those 3-5 points to add up quickly. And it can take a while to recover. To be clear, a hard check only occurs during credit applications like applying for a credit card or loan. The alternative is a soft inquiry, which happens when a person receives “pre-approved offers” or checks their score with a credit monitoring service. A soft inquiry has no direct impact on your credit score.
Avoid or Minimize Interest
Avoiding interest is done by paying off the balance in full on or before the due date. However, it’s impossible to avoid interest on a cash advance. Cash advances occur when credit transactions end in cash. Examples of this include atm withdrawals, money grams, etc. But many students are unaware of a cash advance, its corresponding fees, and its separate interest rate. Additionally, paying above the minimum on a credit card saves money in the long run. Anything short of the entire previous balance will accrue the total amount of interest charged on the entire prior balance. However, paying above the minimum will at least lower the principal balance and reduce future interest payments.
Keep Limits Low
The higher the credit card limit, the higher the potential interest charge. There are two ways to increase a limit. One option is manually requesting it from your lender, which will trigger a hard credit check. The other is having it automatically increased by your lender based on a soft inquiry. As such, it’s a good idea to contact the lender and request no auto increases be completed. This method can stave off the temptation of spending credit recklessly. However, special care must be taken to pay lower limit cards down to avoid reflecting overutilization of credit.
The average student debt is on the rise. Many factors that contribute to this extend beyond personal finance and into the realm of complex economics. However, a moderate amount of individual responsibility is still available to help manage credit. This is to say that despite the state of the economy and interest rates, there is still a clear path to maintaining and building credit scores. Although more critical in the modern world, these methods are timeless concepts that involve not using credit, paying credit, and keeping track of credit checks. College students have the resources to have positive credit experiences. However, many aren’t sure where to start. This burden falls on the shoulders of credit companies, higher educators, and mentors.