Anya Kamenetz Generation Debt

Pop quiz: What exactly is the problem with credit cards?

1. The aggressive, misleading marketing: "You are pre-approved" letters for your dog.

2. The fine print: Fees, penalties, and high interest rates.

3. It's the debt, stupid!: Credit cards let you buy stuff you can't afford with money you don't have. They make you poorer in the long run, plain and simple.

Personally, I choose 4. All of the above.

Debt, Good and (Mostly) Bad

I have a massive distrust of my credit cards. One I barely touch and keep only for emergencies, and the other I pay off every month.

Yes, there are sane uses for credit: for convenience, to separate business and personal expenses, to get membership rewards, and to build a good credit rating by making on-time payments. However, you can get these benefits with none of the drawbacks by paying off the card in full each and every month, and I think most people should make it a goal to get as close to that mark as possible.

In very limited circumstances, people might reasonably use credit to invest in their own business. They're obviously taking a risk, but at least it's a risk with a possible reward. Getting into debt to buy depreciating consumer goods is a risk with no upside.

Let Us Prey

But the reality is, more and more members of Generation Debt have credit cards, and they're getting into debt sooner. Over 90 percent of college seniors already have at least one card, and 71 percent of young adults carry a balance compared to 55 percent of older folks. One study in 2001 found that the 25- to 34-year-olds who did have credit card debt owed over $4,000.

Part of the reason so many people are getting into trouble has to do with deliberate industry attempts to make young people into long-term credit customers. Last week, the U.S. Public Interest Research Groups (PIRGs) announced a campaign to deal with problems No. 1 and 2 in my quiz: the misleading marketing and unfair consumer practices that they say credit card companies engage in on campuses. (Check out the campaign here.)

When our parents attended college, and even into the 1980s, a student needed a cosigner to get a credit card. Today, a 22-year-old college student with no credit history can get loads of credit easier than a 22-year-old with a steady job and no credit history. The 10 big credit card issuers want loyalty, and they've found that broke students make good customers. Campuses are swarmed with marketers who set up tables on campus and offer food, T-shirts, and other freebies in exchange for filling out an application.

A Captive Audience

Some colleges have banned these marketers, while others cooperate with them. As reported by the Des Moines Register, for example, the University of Iowa and Iowa State University alumni associations have long-term-affiliation contracts with Bank of America to market their credit cards. The agreement guarantees the company access to personal information about University of Iowa students and parents, as well as access to campus facilities.

These affiliation deals can cover everything from on-campus ATMs to bookstore tie-ins to membership rewards. Bank of America markets special Hawkeye credit cards and gives their best customers the chance to have lunch with the Iowa football team. Through these kinds of deals, colleges are basically selling out their students as captive audiences for a few million dollars.

The Student PIRGs have 40 chapters on campuses nationwide that are going to engage in counter-marketing to raise awareness of the dangers of easy credit. They'll set up tables of their own on the quads and give away information and "don't be a sucker" lollipops. They'll also be pushing college administrators to accept a set of principles banning aggressive credit card marketing, including affiliation agreements like the one at Iowa, stunts like free pizza, and using the lacrosse team as their sales force.

Worst Practices

The PIRGs aren't stopping there. Ed Mierzwinski, the Consumer Program Director of the U.S. PIRGs, says, "We think colleges can be catalysts and put pressure on the companies to change their practices more broadly." They want to discourage the punitive terms and fees that are lurking in the fine print:

• Credit card issuers can change your interest rates at any time for any reason, including if you underpay by $1 or pay late by one day. Your introductory 0 percent rate may morph into 29 percent overnight.

• Sixty percent of users pay at least one late fee, penalty, or over-limit fee each year, averaging $35. To make sure you do foul up, some cards have rules that the payments must be delivered by 11 a.m. the day they're due.

• Universal default, aka "risk-based re-pricing." Even if you do everything else right, your interest rate could skyrocket if you try to get more credit by making a credit inquiry or opening a new card.

(For more on these practices, see this hilarious Web cartoon produced by Americans for Fairness in Lending.)

No Way to Start a Financial Life

Speaking as part of the PIRGs' campaign, Rachel Wikoff, a 2007 graduate from the University of California at Davis, told her story at a telephone news conference earlier this month.

She had a credit card for about a year, and had set up automatic payments through her bank account, paying a little over the $10 minimum. Then, one month, without her noticing, her payment was suddenly calculated differently, so the automatic transfer fell short. "The morning of my twenty-first birthday, I got a call that I had missed a payment. I had over-the-limit fees, late fees, my interest rate spiked from 11 percent to 29 percent, and my minimum payment went from $10 to $89. I couldn't afford it -- I had to take out another student loan. And it ruined my credit."

Everyone has some degree of choice about whether to get into debt, of course. At the same time, most people are going to make a mistake sooner or later with bill paying, especially as rookies. "People consistently underestimate the probability that they're going to get into financial trouble," says professor Robert Lawless, a credit expert at the University of Illinois who contributes to the Credit Slips blog. "They tell themselves that they're going to just build a credit history, but the card gets used in very inappropriate ways. The credit card industry knows this." When you trip up, they'll be there to profit from your fall.

Do you really want a financial relationship with a company that reserves the right to nearly triple your interest rate and piles on fees and penalties for the slightest infraction? Is that the way to start a solid financial life?

Admirable Efforts

I don't know if the PIRGs campaign on its own will persuade credit card companies to change their ways and offer cards with fair terms and wide-open policies. Dr. Lawless says there's hope: "The credit industry often responds to perceived regulatory threats."

Like a bill currently in Congress, for instance. The Student Credit Card Protection Act would reinstate the requirement that parents or guardians must be cosigners on any student credit card with a limit over $500 for full-time college students under 21. It would also require that the creditor get proof of income and credit history before issuing a card.

In the meantime, I applaud the PIRGs' work in trying to bring accountability to colleges, especially for raising financial literacy among their students. The word needs to be spread: Credit cards aren't fair, they aren't fun, and they aren't your friend.