Why is student credit card debt rising?

By Marianne Curphey

University students are receiving the first tranche of their student loans for this academic year. But new data suggests many of them will be struggling with debt and using their credit cards to help supplement their student loans.

A report from FICO, which analyses credit card use and payments for financial services companies, reveals that although students are getting better at paying off their debt, the balances on student credit cards are rising.

The FICO data shows that the percentage of student card accounts that have balances two cycles (60 days) overdue reached a two-year low in May 2014. Yet student balances went from £521 in June 2013 to £733 in June 2014, a 40% increase. And the percentage of UK student cards that were over their credit limit rose in June for the first time since November 2012.student-credit-card-debt

So are students becoming more careless with their money, or are they using credit to pay for school expenses their loans don't cover? According to some experts, a little of both.

Using credit cards to manage finances
Twenty years ago, it was almost impossible to get a credit card while you were a student, but now students are increasingly using cards as a way of managing money and debt, says Dennis Hussey, a debt adviser with National Debtline.

"Budgeting can be difficult for them, as the student lifestyle is not as predictable or as easy to pin down to a set of figures as a family household," he says. "At the start of the year, students need to know when they are going to be getting tranches of their student loan and how long each is going to have to last them. Then they can work out what they are going to need and what big overheads need to be covered like bills, rent, course materials and travel."

Kirsty Bowman-Vaughan, young people policy manager at the government-backed Money Advice Service, said that in general, those aged 18 to 24 are likely to have a lower outstanding balance on their credit cards and are more likely to pay them off in full every month.

However, those that do seek help have an average unsecured debt of £5,000, some of which is due to not being able to keep up with credit card payments.

Part of the problem, she says, is that because students have to take on significant debt just to get through their studies, debt has become "normalised". "In this age group, being in debt is normal so they don't feel like they need help and few recognise it as a problem," says Bowman-Vaughan.

On top of that, the cost of living is rising, Hussey says, along with the cost of student accommodation, both of which contribute to higher costs for students.

Bowman-Vaughan suggests that students who are struggling with debt should seek advice and may find free help on campus from trained advisers working for NASMA, the National Association of Student Money Advisers.

Careless spending
Andrew Hagger, director of MoneyComms, the money information service, says students should exercise caution when it comes to credit cards. "If they are going to use them responsibly to tide them over for a month then that is OK," he says, but cautions that in reality, problems often mount.

"The problem is that everyday spending decisions -- whether to go with friends for the evening or not -- can spiral out of control," says Bowman-Vaughan. "Young people are innately optimistic; they are always thinking that they are going to get a good job and get promoted and earn more money, but as we know, life doesn't always turn out that way."

"They quickly get run up to the limit and, although student card limits are not high, they could quickly be adding another £1,000 worth of debt," Hagger says. "If you were borrowing £500 at a rate of 19.9 per cent, then you could be paying £100 a year in interest. If you had a £2,000 balance, you would be paying £400. So if you were at university for four or five years then [you] would add another £1,600 on top of your debts by the time you were leaving."

There is a lot of temptation
According to Hussey, credit card providers may be adding to the problem. Banks see students as a short-term loss but potentially lucrative in the long-term, he says, so they are keen to offer accounts to students.

"In terms of credit cards, a lot of students are going to be hitting their credit limits, but they are likely to become the salaried workers of the future," Hussey says. "When they start working, then they have the opportunity to repair their credit files and so they are attractive to lenders."

The best thing to do, Hagger says, is wait until you're earning a regular salary before taking out a credit card, rather than hoping to pay it off "eventually".

See related: Two universities make credit card education priority, Your guide to student finance

Published: 14 October 2014