In his 1887 novel Looking Backward, Edward Bellamy wrote many times about the concept of using a card for purchases— a credit card.
By the late 19th century the first charge coins arrived. In the 1930s Air Travel Cards emerged. Then, in 1958, Bank of America became the first to successfully establish a revolving credit financial system that was trusted by merchants. The modern credit card was born.
Today, credit cards, and credit scores, rule the financial world of the United States. Good credit is needed to get car loans, sign a lease, get a mortgage, and even get additional credit cards.
According to a Forbes report in Q4 (2022), 84% of U.S. adults had a credit card in 2021. In addition, “about 73% of Americans have a credit card by age 25, making credit cards the most common first credit experience for young adults”.
Forbes also reported that roughly 191 million American adults have at least one credit card account. 50% have at least two cards and 13% have at least five cards.
The number of credit cards varies by generation. On average, Gen Z has 1.9 credit cards while Baby Boomers have 4.6.
But how much does Gen Z know about the world of credit? Unfortunately, not enough.
In a survey of 19 Emerson College undergraduate students (sophomores, juniors, and seniors), ranging from ages 20-22, most students report having no knowledge of credit to moderate levels.
Of these students, only nine report having been taught about credit scores at some point in their life. Of those nine, seven were taught by family/friends, and two were taught in public high school.
This isn’t shocking to hear— financial literacy is a rare subject to be taught in schools. But these numbers don’t reflect financial independence.
Of the 19 students reported, only four reported that their banking remains connected to their parents/legal guardians in some way. None of those four students have a credit card in their own name.
This means that many college students are financially independent with no history of credit. Why is this a concern?
Credit scores are a very important feature of independent, adult life.
A credit score provides a comparative estimate of an individual's creditworthiness. Banks and credit card companies use these scores to evaluate the risk of lending money to consumer
s. It is an inexpensive and main alternative to other forms of consumer loan underwriting.
Credit scores can differ depending on who generates them. The FICO score was first introduced in 1989 and is used by the vast majority of banks and credit grantors. FICO scores are based on consumer credit files of the three national credit bureaus: Experian, Equifax, and TransUnion.
So what’s a good credit score?
Credit scores can range from 300 to 850. The score is made up of a variety of factors; repayment history, types of loans, length of credit history, an individual’s total debt, and credit utilization.
Regardless of age, those who are initially building their credit score can start from 500 to 700. The higher the score, the better the creditworthiness.
Companies use these scores to make decisions on whether to offer you a mortgage, credit card, or auto loan. Credit scores are also used for tenant screening and insurance and to determine the interest rate and credit limit you receive.
Consumers in the U.S. have an average FICO® Score of 703. Regardless of your age, those who are initially building their credit score can start from 500 to 700. This is because the length of credit history is important in evaluating your score.
So if you start earlier, your credit score has a better chance of going up. But are colleges students aware of this?
According to a report by USA News, over 67% of college undergraduate students have a credit card in their own name.
This isn’t a bad number. But, it doesn’t mean that they understand how the system works. Only 30.4% know what their credit utilization ratio means. Of the rest, 16% think it refers to how frequently you use your credit card and 13.6% believe the ratio measures how frequently you use your credit card compared with a debit card.
But, almost half of college undergrads also reported that they have credit card debt. Having a credit card in college is a great way to build your credit history if used responsibly.
If college students are expected to have credit cards to lengthen this history and improve their credit scores, who is teaching them how it works?
Luckily, some organizations are working to change this.
The Financial Literacy and Education Commission was established under the Fair and Accurate Credit Transactions Act of 2003. This Commission was tasked to develop a national financial education web site (MyMoney.gov) and a national strategy for financial education.
The strategy includes Youth Savings Programs such as in-school bank and credit union branches, which can expand the financial capability of youth.
The National Financial Educators Council is another leading provider of independent financial wellness resources. The Council works to provide “resources, training, and opportunities to effectively support others in their communities to work toward greater financial security”.
Emerson College has its own Financial Wellness Program too, as do many colleges and universities. This office provides resources and tools to help students with financial literacy and confidence entering adulthood.
However, this resource isn’t mandatory nor advertised strongly within the Emerson Community. Of the 19 students surveyed, none reported that they were taught about credit scores during college.
The resources exist for students and all consumers to become financially literate and learn to build good credit. But these resources are hidden and none are a part of private or public education.
College students are behind when it comes to financial literacy and independence. And while it may be up to them to educate themselves, the resources do exist if you know where to find them.