CU Tomorrow Business Brief

The First Credit Card

ideas grow here

PO Box 2998 Ben Rogers

Madison, WI 53701-2998 Driver, CU Tomorrow
Phone (608) 231-8550
Filene Research Institute
PUBLICATION #176 (12/08)
www.filene.org ISBN 978-1-932795-55-4
 About Us

Deeply embedded in the credit union tradition is an ongoing search

for better ways to understand and serve credit union members. Open
inquiry, the free flow of ideas, and debate are essential parts of the
true democratic process.
The Filene Research Institute is a 501(c)(3) not-for-profit research
organization dedicated to scientific and thoughtful analysis about
issues affecting the future of consumer finance. Through indepen-
dent research and innovation programs, the Institute examines issues
vital to the future of credit unions.
Ideas grow through thoughtful and scientific analysis of top-priority
consumer, public policy, and credit union competitive issues.
Researchers are given considerable latitude in their exploration and
studies of these high-priority issues.

CU Tomorrow is a Filene Research Institute clearinghouse for credit

union young adult strategies. The project publishes research and
open-source business plans to help credit unions attract younger
members, promising young professionals, and younger volunteers.
Initiatives include:
• Business briefs—open-source, young adult business plans for
credit unions.
• 30 Under 30—entrepreneurial SWAT team of young credit
union professionals.
• Community—CU Tomorrow and Filene Web sites for publi-
cation and idea sharing.
• Leagues—statewide collaboration to implement CU Tomor-
row programs.
• Recruiting—talented interns and new hires from high-profile
universities.
• Research—academic research, focus groups, online surveys,
and interviews.
Visit www.cutomorrow.org for more details.

Copyright © 2008 by Filene Research Institute. All rights reserved.

ISBN 978-1-932795-55-4
Printed in U.S.A.
 About the Author

Ben Rogers
The author, Ben Rogers, is driver of the Filene Research Institute’s
CU Tomorrow project and director of the Institute’s 30 Under 30
group. Ben is a former editor of The CEO Report and chairman
of the National Directors’ Convention. Ben holds a master’s degree
in journalism from Northwestern University and graduated cum
laude from Brigham Young University with degrees in English and
philosophy.

Acknowledgments

The Filene Research Institute would like to thank PSCU Financial

Services, the nation’s largest credit union service organization, for its
generous financial support of past, present, and future studies of the
under-30 population and the potential that young adults represent
for the continued success of the credit union system. We also grate-
fully acknowledge the Credit Union Executives Society (CUES),
Fiserv, and the Corporate Credit Union Network for their financial
and intellectual support of research and projects focused on credit
union growth.
 The Challenge
American youth are awash in plastic. One in three high school
seniors carries a credit card.1 Undergraduates report freshman year as
the most popular time for getting credit cards, with 56% reporting
having obtained their first card at age 18.2 A young adult’s first credit
card is a rite of passage, a gateway to a solid credit record, and often a
financial (and social) necessity.
Young adults, responsible or not, are very likely to get at least one
credit card during the transition period after high school. Credit
unions that decline to offer or to market their own cards to young
adults miss the chance to build a relationship and a responsible credit
user during that key transition phase.
Credit unions sometimes argue that issuing credit cards to young
consumers with no credit history is irresponsible. But national issuers
already sponsor events on high school campuses, mail offers directly
to teenagers, and offer credit cards with limits as high as $1,000 to
16-year-olds.3 Two-thirds of college students have at least one credit
card, and fully 91% of graduating seniors have one, according to
Curtis Arnold, founder of CardRatings.com.4
Credit unions that want to deepen relationships with young adults
have to offer an attractive competing product. Those that don’t will
miss the chance to capture an active borrowing relationship that lasts,
on average, 15 years for credit cards.5
“Banks have a strategy to seek out customers who have never had a
card. College students are among the most prominent targets for this
marketing. They are young and understand that they need credit to get
ahead in the world. Some need credit because of the rising cost of a col-
lege education. Finally, most of them are clumped together on campuses
that they either commute to or live at. This makes them easy to target.6”

Make It Yours
“In recent years, credit union membership and loan growth have
sputtered. Interest income is sagging and the average member age is
up to 47. Although some have recognized the power of Gen Y, few

1 Liz Pulliam Weston, “Teach Your Teen How to Handle Credit Cards,” moneycentral.msn.com/content/collegeandfamily/raisekids/
p40989.asp (retrieved October 17, 2008).

2 Nellie Mae, Undergraduate Students and Credit Cards in 2004: An Analysis of Usage Rates and Trends, May 2005.

3 Libby Wells, “Card Issuers Target Teens for Latest Plastic Attacks,” Bankrate.com, March 21, 2007.

4 Personal communication with the author.

5 Robert Manning, Credit Card Nation (New York: Basic Books, 2000), 167.

6 Edmund Mierzwinski and Christine Lindstrom, Characteristics of Fair Campus Credit Cards, U.S. PIRG Education Fund, April 2008, 1.

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credit unions have expanded their lending products or policies to
serve this demographic. Credit unions are starting to get Gen Y in
the door, but many fail to offer starter lending products to meet their
needs and lifestyle.”7
Citi offers co-branding with MTV. CapitalOne offers a slew of
rewards. American Express offers prestige and exciting giveaways.
Most credit unions cannot compete with such comprehen-
sive rewards or marketing. Therefore, they should differentiate
themselves—to students and to parents who recommend cards to
their adult children—by offering a first credit card that is demon-
strably better for the first-time cardholder.
Many young consumers don’t understand the fundamentals of inter-
est payments or the financial risks of paying down a card with only
the minimum payment. In fact, only 48% of high school seniors in
a recent survey correctly said that a credit card holder who pays only
the minimum amount on monthly card balances will pay more in
annual finance charges than a cardholder who pays his or her balance
in full.8
But young adults can still be responsible borrowers. A Georgetown
University Credit Research Center study found that 88% of under-
graduate student credit cards are, on average, paid on time and in
good standing. The average for all adults is 91%. The average bal-
ance on a student credit card is $552, about one-fourth the size of
the balance of older adults and one-third the size of the balance of a
non-student cardholder.9

The Rewards Conundrum

Young adults are no different from older consumers in expect-
ing rewards or incentives to use the card. Rewards cards are a
double-edged sword: While they encourage higher use, they often
charge higher interest rates, which young adults who carry a balance
can ill afford. But cards that carry no rewards may not be as appeal-
ing to a “what’s in it for me” consumer.
Major credit card issuers are ramping up their spending on rewards
programs, from a total of $10.2 billion in 2006 to a projected $18.4
billion in 2010.10 Young adults are not much different from average

7 Mark Meyer, COOL Solutions: Build Credit with Y (Madison, WI: Filene Research Institute, 2006), 4.

8 JumpStart Coalition for Personal Financial Literacy, 2008 survey.

9 Michael Staten and John Barron, College Student Credit Card Usage, Credit Research Center, Georgetown University, McDonough School of
Business, June 2002.

10 Curtis Arnold, How You Can Profit from Credit Cards (Upper Saddle Ridge, NJ: Pearson Education, 2008), 2.

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 consumers, and when it comes to rewards, American consumers
prefer cash. After cash, their interests diverge significantly:
• 56% of Americans prefer cash-back rewards
• 23% prefer air miles
• 12% prefer points
• 9% prefer automatic discounts or rebates11
Credit unions should consider a rewards component with merchan-
dise or, if possible, cash. As a responsible alternative for young adults
who often struggle to accrue assets, consider cash-back rewards
deposited directly to a share or other savings account.

Characteristics of a Responsible Card

Credit unions’ credit cards for first-time users should transcend com-
mon industry practices like high late fees, exorbitant interest rates, and
other “gotcha” pricing (see “Credit Card Tactics to Avoid” on page 5).
Late fees on all cards have risen much faster than inflation, from an
average of $12.83 in 1995 to $33.64 in 2005.12 A responsible credit
union card should still include late fees to motivate timely payments,
but the fee should be nominal.
Student-oriented credit cards from 33 issuers carry an average APR
of 15.26% as of September 2008, according to Arnold.13 A respon-
sible credit union credit card can be profitable while staying at or
below this average.
With a renewed national interest in saving, credit unions can differ-
entiate their credit card programs by offering a savings component,
says Arnold. He points to the One Card by American Express, which
deposits 1% of purchases into a 2.75% savings account. American
Express calls it a “savings accelerator,” but Arnold questions the
$35 yearly fee, which negates the first $3,500 that cardholders spend.
Other than that, he says, “I like the forced savings component.
As Americans having a negative savings rate, I see this as a way to
jump-start savings.”14
Robert Manning, author of Credit Card Nation, has long criticized
irresponsible lending and consumers’ “cognitive disconnect” of
spending all or more than they earn.

11 Ibid., 30.

12 Ibid., 13.

13 Personal communication with the author.

14 Ibid.

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“Credit card companies encourage fantasies of easy money because stu-
dents are so profitable. Teens have financial naiveté, high material expec-
tations and responsiveness to relatively low-cost marketing campaigns,
high potential earnings, and future demand for financial services.”15
He offers several suggestions for a starter card with credit union values:
• Offer a 1.9% introductory rate that rises steadily and predictably
to demonstrate the real cost of carrying a balance.
• Share members’ credit scores with them once per year, along with
information about how to improve it.16
• Allow up to three free over-limit or late payment fees per year.
• Link a savings or investment account to the credit card and allow
members to deposit to it when paying their bill.17
Young adults are graduating from college today with much higher
student loan balances. The average amount borrowed by undergradu-
ate students increased by 39% to $11,179 in the 10 years leading up
to 2006–2007.18 Experts forecast an even steeper increase in educa-
tion expenses as a result of the 2008 credit crisis.19 With education,
living, and travel costs rising, students and non-students alike have
increasingly relied on credit cards to make ends meet.
Parents can be your best partner in promoting a responsible first credit
card to young adults for two reasons. First, parents are likely to trust
their own credit union over a national card issuer as a place for their
teenage or young adult children to receive their first credit card. Second,
undergraduates (and probably non-students as well) report their parents
as the second most common source for selecting a credit card vendor.
The first is direct-mail solicitation. Consider pairing a direct-mail
solicitation that explains to the parent why a credit union credit card is
a responsible choice with a solicitation to the young adult.
Consider this advice from credit-card expert Arnold when crafting
your communication with parents:
• Get a card with a low limit and no annual fees.
• Discuss the details of the card with your teen, including the inter-
est rate on purchases and cash advances, fees, due dates, and grace
periods. Review all transactions every month and discuss them
with your teen.

15 Manning, Credit Card Nation, 169.

16 Filene i3 hatched a product with a similar goal. Smart Score helps members understand the relevance and importance of their credit score.
See filene.org/home/innovation/i3ideas to get more information.

17 Robert Manning, personal communication with the author.

18 Trends in Student Aid (Washington, DC: The College Board, 2007).

19 Craig Karmin and John Hechinger, “Crisis Shakes the Foundations of the Ivory Tower,” Wall Street Journal, October 17, 2008, A9.

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 • Show your teen what finance charges will apply if the balance is
not paid in full and on time. This includes any interest and fees.
• Realize that when teens reach a college campus, they’ll be inun-
dated with card offers and will be able to get a credit card, even if
you are their sole financial support or are unaware of it.
• Be a good role model for your children. Show your teens your
credit report and a credit card bill. If you have high credit card
debt, explain how it happened and what you’re doing to get out
of it. You don’t have to be perfect to set a good example.
• Discuss how everyone needs to limit card use. Explain that you’ll be
setting limits before your teens head off for school, and explain what
will happen if they run up bills they can’t pay. Will you be able—or
willing—to bail them out, or will they be on their own? Lay out the
consequences. It’s much better that they know in advance.20

20 Arnold, How You Can Profit, 165.

CREDIT CARD TACTICS TO AVOID*

Many financial institutions include clauses often can draw on family support. Offer
in the fine print of credit card contracts a fair market rate to first-time bor-
that allow them to change terms or charge rowers and explain that their rate may
unexpected fees. Here is a list of tactics to improve and their limits may rise after
avoid to make your credit card the respon- responsible repayment.
sible choice: • Variable due dates—Young members
and their parents will appreciate a con-
• Capricious rule changes—Many issuers
sistent monthly due date.
include clauses that reserve the right
to change terms at any time or for any • Over-the-limit fees—Some issuers
reason. Tell first-time credit card hold- generate fee income by honoring a
ers that you will never change terms on payment that exceeds the card’s credit
them without telling them why, in plain limit and then charging for the conve-
English. nience. A responsible first-time credit
card holds the line at the stated credit
• Exorbitant rates—Borrowers with
limit. Consider notifying cardholders
no credit history deserve cautious
who approach their limit that they may
underwriting, but research shows that
be eligible for a credit limit increase, but
first-time borrowers, especially stu-
only if they have a history of responsible
dents, can be good credit risks. They
card management.

* Summarized from Mierzwinski and Lindstrom, Characteristics of Fair Campus Credit Cards.

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With concerns about responsible lending, it is increasingly likely
that Congress will impose stronger restrictions on credit card under-
writing and practices.21 And at least one large issuer is seeing the
light. Kenneth Chenault, CEO of American Express, recently told a
gathering of policy experts, “I don’t believe a company has much of a
future if it earns the majority of its revenues when customers make a
mistake or don’t conform to a rule. ‘Gotcha’ pricing is not the way to
build a sustainable business model.”22

21 Connie Prater, “Senate Banking Chairman: Credit Card Reforms on Tap,” www.creditcards.com, October 15, 2008.

22 filene.org/blog/post/three-big-payment-ideas.

USAGE TIPS FOR FIRST-TIME CARDHOLDERS

• Consider using a debit card instead of a with an excessive rate after the intro-
credit card. A debit card accesses funds ductory period is completed.
on deposit and can be used like a credit • Keep track of your bills and pay them
card without the potential damage. on time. The Universal Default Clause
• Avoid cards with an annual fee. A allows credit card companies to
majority of credit cards no longer increase your interest rate if you are
charge an annual fee. delinquent on any payment, even if you

• Read and understand all of the terms are up to date on your credit card.

of the credit card agreement and be • Call your credit card company after
aware of all of the fees. Avoid cards your first late-payment fee. The first
with multiple fees. late-payment charge will often be

• Avoid cards with an APR of 20% or forgiven if you have a good history

more. There are many credit card offers of making timely payments. Pay your

with more reasonable rates. credit card bill well in advance of the
due date, preferably when you get the
• Pay off the balance every month. If you
statement—waiting until the last minute
are unable to do so, cut up the card.
invites a late-payment fee.
• Stay within your credit limit. If this is a
• Remember that a poor credit record
problem, consider a credit card with a
can affect your future employment
low limit of $500.
and your ability to get a car loan or
• Understand that the introductory rate
mortgage.*
is typically for six months or more,
• If you move, notify your credit card
and some card issuers use it as a
company of your new address as soon
bait-and-switch technique. The attrac-
as possible.
tive introductory rate is often followed

* Meyer, COOL Solutions.

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 Another way to be a responsible young adult lender is to educate
younger members about credit during their regular interaction with
their cards, their bill, or their online account summaries. Consider
repurposing or building on the free information about credit and
credit scores available from the following:
• Fair Isaac Corporation—myFICO.com.
• AnnualCreditReport.com (not FreeCreditReport.com).
• Federal Trade Commission—www.ftc.gov/bcp/menus/consumer/
credit.shtm.

The Rewards of Young

Figure 1: What’s in Your Score Adult Lending
A responsible, attractive credit card for young
adults is one of the clearest paths to a relation-
10% Payment history ship with young adults. It reaches them at a time
10%
35% Amounts owed when their financial needs are mostly transactional,
15% Length of credit history and it can be a gateway to other loans and, more
New credit proximately, deposit accounts.23 Most consumers
30%
Types of credit used select their first financial institution before they are
25, and they remain with this institution for about
Source: www.myfico.com/CreditEducation/WhatsInYourScore.aspx. 15 years.24 Relationships with card issuers last just
as long.

What to Measure
Tracking the adoption and results of CU Tomorrow business briefs is
essential. If you choose to launch a young adult transaction account
similar to those outlined in this brief, please do these two things:
1. Record and report:
a. The number of young adult credit cards opened.
b. The cumulative average age of account holders.
2. Send your contact information and answers to the above ques-
tions to Ben Rogers at benrogers@filene.org.

23 Benjamin Rogers, Young Adult Transaction Accounts (Madison, WI: Filene Research Institute, 2008).

24 Meyer, COOL Solutions.

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Cold Hard Facts
• The average consumer relationship with a credit card lasts
15 years.
• Sixty-nine percent of young adults aged 18 to 34 use credit cards,
while only 53% use debit cards.25
• Fifty-five percent of students have paid for textbooks with credit
cards; 24% have paid for tuition with credit cards.
• Undergraduates reported freshman year as the most popular time
for getting credit cards, with 56% reporting having obtained their
first card at age 18.
• Eighty-five percent of American households had a rewards card in
2007; 80% of cardholders received some type of reward for their
cards.
• Late fees have risen much faster than inflation, from an average of
$12.83 in 1995 to $33.64 in 2005.

25 Jinkook Lee, Attracting Young Adults: What Do We Know about Their Use of Financial Institutions and Payment Behaviors? (Madison, WI:
Filene Research Institute, 2008).

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 CU Tomorrow Business Brief

The First Credit Card

ideas grow here

PO Box 2998 Ben Rogers

Madison, WI 53701-2998 Driver, CU Tomorrow
Phone (608) 231-8550
Filene Research Institute
PUBLICATION #176 (12/08)
www.filene.org ISBN 978-1-932795-55-4