Young People Tempted By Easy Credit
MICHEL MARTIN, host:
Now it's time for Money Coach. That's our weekly conversation about personal finance and the economy. Our regular contributor Alvin Hall is traveling. But while he's been gone, we've been talking about credit cards, following along as Congress has been chewing over the details of President Obama's plan to make credit card policies more consumer friendly. You can check out previous segments by going to the TELL ME MORE page at npr.org. Today we're focusing on how credit cards are being marketed to minorities and young people, especially college students.
Joining us now to talk about this is Boyce Watkins. He is a well known commentator and blogger, and an assistant professor of finance at Syracuse University. He's also been calling out celebrities who've been pushing their branded prepaid cards. We want to hear more about that. We are also joined by Emmy award winning journalist, Valerie Coleman Morris. She is the host of "With the Family in Mind", a CBS network radio program about money management. I welcome you both. Thank you for joining us.
Professor BOYCE WATKINS (Finance, Syracuse University.): Thank you for having me.
Ms. VALERIE COLEMAN MORRIS (Host, "With the Family in Mind"): Nice to be with you.
MARTIN: Professor Watkins, you're on a college campus. Do you - are the credit card companies very present? Do you think they're very aggressive in marketing cards to students? And what's your opinion about this?
(Soundbite of laughter)
Prof. WATKINS: Well credit card companies - they are a little bit like drug dealers in the sense that they can smell their prey. And they know when you have an addictive personality and the easiest person to give quote unquote "free money" to is an 18 year old who doesn't know any better. And the best thing about that is that it's similar to the corporate bailouts in the sense that credit card companies fully understand that if the student does not pay their credit card bill, they can call mom and dad and they'll take care of it for them. And obviously they didn't know, my mother, because she hung up on them, you know, the truth of the matter is that there needs to be greater regulation of these companies when they come on campus.
MARTIN: Well, Valerie, some would argue that, you know, credit cards, managing, figuring out how to manage your cards is one of the tasks that adults have to figure out and that college is a place that kids figure out how to be an adult. So by that standard, what shouldn't they learn how to use their credit cards while they're college students?
Ms. MORRIS: Michel, I very, very strongly feel that it needs to start long before college because by that time bad habits have already been formed. And I'm sure that Boyce would agree with me that bad habits when it comes to money can be life long unless there's some intervention.
So while credit cards have their place and prepaid cards can have their place, neither can be used effectively if the student isn't educated. And that's my concern. There's not an education factor that comes along with it. And as far as if they can meet the bills, and their parents then will, there are many parents who just can't afford to do that nor should they because part of good money discipline is being responsible, understanding you make choices, they have consequences. And when it comes to signing up for a credit card or having a prepaid card that has hidden fees, you have to have someone who has an educated mind so they're able to assess the benefit to them - or is it the benefit to the issuer?
MARTIN: What kind of education do you think is wanted? What specific things do you think students need to be mindful of if they're tempted to get a credit card while on campus?
Ms. MORRIS: Well, first of all, I know that you have probably walked down many college campuses during orientation week, and here are students - get a free mug, sign up for a credit card; get a free Frisbee, sign up for a credit card.
What they don't understand is if they have a line of credit, let's say $2,000 on each credit card, and they have two, that is potentially $4,000 in debt. They go to get a loan, and someone will look at that and they'll say you're in debt.
They say to me all the time, but Mrs. Morris, I'm not going to use it. My point is a credit card can have a good use, but you have to understand that plastic and status, which is my concern right now with this Rush Visa card, it's making students feel that those two things are related, but it's related with a disconnect. They don't understand the responsibility that comes when they make that choice.
MARTIN: Speaking of the RushCard, Professor Watkins, you've been writing quite a lot about this. I'm going to play a short clip of an advertisement for the prepaid Visa RushCard. It's the product of a partnership between Unifund and Def Jam Records founder Russell Simmons, and here it is.
(Soundbite of ad)
Unidentified Man: This is Russell Simmons, successful entrepreneur and philanthropist. He thinks everyone should be financially empowered, so he developed the RushCard. It's a prepaid Visa card. There's no credit check. Everyone is eligible to sign up. You don't even need a bank account. Just go to rushcard.com, choose your style, and we'll rush your card to you. Some Visa restrictions may apply. Then as soon as you add money…
MARTIN: I think you get the idea. So Professor Watkins, what's so terrible? It's not a credit card in the sense that there's no credit line attached to it. It's in essence a debit card. It's a loaded debit card. What's so terrible?
Prof. WATKINS: Well, the first thing I'll say is I'm not a critic of Russell Simmons in the sense that I have a lot of respect for Russell. What I will say is that it's very important that we also make sure that Russell understands his responsibility in making sure that he carefully teeters that line between helping people get access to basic services versus being portrayed as a predatory banker.
When I presented the RushCard to several predatory banking experts within the field, they - many of them had an unfavorable perception of the card because some of the fees were a little bit high. And so…
MARTIN: So you have to pay a fee to use your own money?
Prof. WATKINS: Yeah, absolutely. There's a $20 activation fee. There's a $1 convenience fee for every transaction, but it's capped off at $10 a month. There's a 50 cent fee to check your balance. There's a two dollar - a $1.95 fee for every time you use the card in an ATM machine. The $1.95 is in addition to the regular $2 or $3 or $4 that's charged by the ATM machine.
MARTIN: But you've gone so far, though, as to describe these cards as similar to pimping their customers, but 1.5 million RushCards have been issued since 2003. What does that say to you? Does it indicate that these cards are filling a need in under-served communities? What does that say?
Prof. WATKINS: Yeah, absolutely. You know, one thing people don't understand about banking and finance is that typically those who have the least money end up paying the most money to get access to basic services, and so I've called out for President Obama to ensure that every American at least has access to a bank account so they don't have to turn toward any available option in order to get a card. Because one of the easy things that can be done with RushCard is they can very logically and correctly state that, look, our card is much better than the check-cashing services that you typically go to when you need to get your check cashed.
Well, my concern is that we shouldn't have to go to a check-cashing service, and the other point that Valerie had mentioned earlier is that we need fundamental, basic financial literacy taught in the high schools. We force kids to read these books from old English that they're never going to ever reference again in their lives, but we don't teach them how to balance a checkbook. We don't teach them how to buy a home. We don't teach them how to make a budget. So financial literacy should be one of the fundamental tenets of an American education.
MARTIN: Valerie, you mentioned status. What did you mean? You're saying your concern is that status is playing a role in people's decisions about credit, as opposed to their financial needs. What did you mean by that?
Ms. MORRIS: Well, a couple of things. Plastic and status, it's like whatever I want I can get. Here's my card, and I'll take care of it later. It's a delayed - a lack of delayed gratification. It's an instant gratification, and that can get young people in trouble. They think that the status is associated with - and I agree with, Boyce. This is not - I'm not against what Russell is doing. I think we need to be very clear that the Rush Visa Card, it's an entrepreneurial venture. It's not a philanthropic venture, and it is a different kind of money trap.
So that's the reason that I say students oftentimes confuse that lifestyle which they see others leading, and they don't understand the dollars and cents of how that person can get to that point and use their money that way.
MARTIN: But what about - you said some students say to you, well, look, I'm not going to use it. I just need it in case of emergencies. What if, and this does happen, you know, financial aid isn't delivered on time or whatever, and then the student needs to buy books or something? I mean, businesses, small businesses get bridge loans when they need to buy inventory, and then they pay it off. Is it just your sense that young people just don't - aren't equipped generally to have the tools, to manage these tools appropriately and that they should find other means, or what's your bottom line?
Ms. MORRIS: I think that prepaid cards can be very helpful. I sent my daughters to college with prepaid cards. It did a couple of things. Number one, it taught them a budget. It said this is how much money you have, and when that is gone, you have to figure out a way to have more, whether it is the agreement that I have made that I will provide X number of dollars a month to them, but it teaches the early signs of a budget, which still many adults don't have. That's the first thing.
The second thing is young adults are a perfect audience. They're young enough that companies say let me get them early, keep them as customers when they become wage earners. So this is an entry point for a lot of young people.
My single concern, if it had to be just one, is that there is no educational factor that says this is how you do it. You can't spend more than you make. You have to understand that if you don't pay on time every time it will impact your credit history and your credit score. They don't understand that money - in our days, when we were younger, our parents would say money doesn't grow on trees. Do you know what I have to say to young people now? Money does not come out of the side of a wall. They think the ATM, you know, it comes out. How do you get it in?
So I think it's an opportunity that celebrities can say to young people, Here are ways that you can access money, here are ways that you can build credit, but unfortunately I think this one, for most young people, can be problematic because it's the celebrity status that they see and associate.
MARTIN: We have to leave it there, to be continued. Valerie Coleman Morris is a financial literacy specialist who focused specifically on women and families. She joined us from the studios of the University of California Berkeley School of Journalism. We were also pleased to be joined by Syracuse University finance professor Boyce Watkins. He joined us from WAER in Syracuse, New York. Thank you both so much for joining us.
Prof. WATKINS: Thank you for having me.
Ms. MORRIS: Thank you, Michel.