Student credits cards are the gateway drug of the credit card industry. They introduce young people to the convenience of plastic borrowing but if students aren't careful, this convenience can lead to suspect credit habits, minimum monthly payments and a habit of expensive revolving debt.
But it doesn't have to be this way. With November being Financial Literacy Month, I think now is an excellent time to discuss how credit card providers could play a role in helping young people learn to manage their cards better by offering some innovative features with their student products. Here are a few suggestions:
1. Complete a comprehensive online course before issuing a credit card.
Many post-secondary students apply for their first credit card at a booth (free t-shirts!) during their school's orientation week without fully understanding how they work. Credit card providers could help educate students on what they're signing up for by requiring them to complete a comprehensive online course before the card is issued. The course would go over things like what the card's interest rate is, how the interest is calculated and what behaviour would cause the rate to change. It would make clear what would happen if students are late or miss making a payment, what the card's fees are and how they work. Lastly, it would emphasize the importance of paying a credit card bill in full each month and require students to prove that they understand the long-term costs of not doing so.
2. A rewards program that rewards good behaviour.
Imagine if there was a student credit card rewards program that rewarded students for handling their credit cards responsibly. Imagine if that program only paid out the rewards if the card's bill was paid completely and on time. Imagine further if that rewards program paid out two times the rewards on all subsequent months, if the bill continued to be paid on time and in full. Imagine.
3. Customer focused communication.
I recently received two separate letters from my bank. One informed me of how much they appreciated my business, and to thank me they had raised the price of my business account. Yay. The second letter also indicated they thought I was a good guy and to prove it they offered me a higher limit on my credit card. Gee thanks. How about a student credit card communication program that actually helps students by pointing them towards better personal finance decisions? Something like this:
Dear Student Customer,
As a valued (insert bank name here) customer, we want to help you make the best possible financial decisions for your future.
To that end, we noticed last month that you made the minimum payment on your (insert bank name here) student credit card. While that is certainly an option available to you, we want you to know that it is probably not the best one. The minimum payment represents a very small percentage of your total balance and it will take you over (insert number here) months and cost you over (insert dollar amount here) in interest to pay your outstanding balance at this rate. A better option would be to pay your balance in full each month and assuming those payments are on-time, you will pay zero interest.
Yes, we know that means that (insert bank name here) will make less money. But as mentioned above, we want to help you make the best possible financial decisions for your future. A future that we hope, will include (insert bank name here) as your banking partner for a long time.
Yours sincerely, Visionary Banker – (Insert bank name here)
You may feel I'm a dreamer (apologies to John Lennon), but I honestly do feel that the big banks and other credit card providers are missing an opportunity to attract new customers – potentially very loyal customers for life – by treating them better while they are students. They will have plenty of time to profit from them once they have graduated.
Now if you'll excuse me, I'm going outside in search of flying pigs.
Robert R. Brown is the author of Wealthing Like Rabbits – An Original Introduction to Personal Finance. You can follow him on Twitter @wealthingrabbit.