Credit Cards on Campus: One Student's Tale of Disaster

Student loans are easily the biggest financial issue for most new college graduates. The average total: $24,000. But credit card debt is right there, averaging $4,100 for new grads, and in some ways it's far more insidious than the debt students incur to get an education. Interest rates are higher on credit cards, which are also a more convenient way to overspend. Card companies may regularly raise your limit, allowing you to get deeper in the hole.
I've spent a fair amount of time reporting the issues with student loans. You can read my recent series here. Now I'd like to highlight the financial threat of credit cards on campus by recounting one student's tale of disaster. This story has a freakishly happy ending. But it still stands as an illustration of how easily and thoroughly the credit card industry can victimize students.
Meet Curtis Arnold The son of two schoolteachers, Curtis Arnold grew up in a middle class home in rural Arkansas. Money was tight and he learned early in life not to be wasteful. When he went away to college in 1988 he was 18 years old and took with him the family's penchant for thrift; he can't recall ever having really splurged. He had earned a full scholarship, so tuition and student loans were never an issue. But he yearned to break free from his parents, financially speaking. So soon after landing on campus little things like gas for his '73 Olds and school supplies were on him, and they began to add up.
Curtis applied for and received his first credit card almost as soon as his feet touched the campus quad at Ouachita Baptist University, about an hour southwest of Little Rock. It was a MasterCard with a $250 credit limit and a required minimum monthly payment so low that his debt would actually grow if he paid no more than the required monthly minimums. "My attitude was you sign up for classes, then you sign up for a meal plan, and then you sign up for a credit card," he recalls. "That was the college experience."
He had no income and virtually no assets, and he had never taken a class in economics or personal finance. So he was puzzled why any creditor would want him. Then he reasoned that the card company must have known what it was doing. He was young, getting an education and would go places. He couldn't imagine making less than $100,000 out of college. The bank was right to give him a credit card. This was the way the system worked.

It didn't take long for Curtis to hit the $250 limit on his card and when he did, like magic, he found that the limit had been doubled to $500. That was his reward for being a careful cardholder and never missing one of those miniscule minimum payments of just $5 or so. By the end of his freshman year the new limit had been hit as well, only this time MasterCard did not automatically up his credit limit. So Curtis applied for a second card. "I thought this was the answer," he says. "But it's at this point that I had started digging myself a grave."
Curtis worked hard at summer jobs and through four years of undergraduate studies he never missed a payment on his first card, or his second card -- or, for that matter, cards three, four and five. Those came along in rapid succession as he reached his limit one card at a time. He was very good at this, or so he thought, and on graduation day in 1992 he was carrying five cards with a cumulative balance of about $5,000. His minimum payments were starting to get stiff; they were up to more than $100 a month. But he didn't change any of the habits that got him there. He kept charging food and clothing and other necessities and letting the balances swell. He figured it would all work out. He was going to get that big job.
But there was no big job for Curtis when he graduated with a history degree. So he enrolled in graduate school at the University of Arkansas at Little Rock and later transferred to the University of Texas at Dallas with his eye on a more lucrative field of study: international business. "I kept chasing the dream," he says. "I kept thinking I'm going to be an international businessman. I'm going to be in Tokyo doing deals. I have this inflated self-image. But the reality is that by the end of the first year of graduate school I've got in the neighborhood of $10,000 in credit card debt. I've got a remedial job where I'm working as a night man earning a little bit above minimum wage. I'm just barely staying afloat."
In grad school his expenses went up, the higher rents in Dallas being the biggest budget buster. But Curtis, who still had never missed a card payment and, remarkably, never would miss one through a decade-long debt odyssey, found comfort in his ability to keep his payment record clean. As long as he could make those minimums, and keep his ambitions high, he figured he was fine.
Then one day he had an epiphany. "I just remember thinking that this can't continue," he says. "By then I'm about $20,000 in and my minimums have mushroomed to $180 and I'm starting to feel the pinch. I'm truly on my own and I start to really ask for the first time in my life, where's this going to end?" By this time he had 10 credit cards and was applying for an 11^th. "That's when my little game started coming to a crashing halt," he says. "I got a rejection letter."
Sensing that the jig was up, Curtis gave up his graduate studies and started logging more hours at work. Still, his debt was growing and soon it stood at $30,000. He was in a terrible bind when his parents threw him a lifeline. His mother had inherited a house back home in Arkansas and offered to let Curtis live there rent-free. That looked pretty good to him, even though he had to swallow his pride to accept. But he did just that, and when he got back to Arkansas he landed a full-time banking job that paid about $25,000 a year. It was a far cry from the six figures he had long envisioned. But with a steady paycheck and a new, healthier attitude about debt he was determined to pay off his balances.
· How Curtis Engineered His Happy Ending
How Curtis Engineered His Happy Ending
Things would get worse for Curtis before they got better. Even living rent-free his debts were compounding. At the pinnacle of his indebtedness he owed $45,000 on his credit cards. Every bit of that was the result of using plastic for everyday items, but with no sense of a budget. There were no extravagances; no spring break trips, no fancy courtships (though he did marry), no new cars, no fine dining. By most peoples' standards, Curtis was living a frugal life. It just happened to be more than he could afford. He was living on his cards, he says, driving when he could have been walking and eating fast food when he could have been cooking.
The turning point came when his parents once again rescued him by agreeing to consolidate his high-rate card debt through a low-rate home equity loan -- in effect, taking his note and paying off all his card debt. Further chastened, Curtis dug in hard and began to wonder how he might expedite payment to his parents. He was angry with himself, and he was equally angry with the card industry for leading a debt neophyte like him down such a destructive path. He wondered if there might not be a way to make the card companies' policies work for him instead of against him.
And there was.
As I said, this story has a happy ending of fairytale proportions. Because Curtis had never missed a payment over 10 years of borrowing to the limit -- and then paid it all off (through his parents' home equity loan) -- he had remained in the good graces of the card companies, which salivated to have him back. Not long after his cards were clear, Curtis was besieged with welcome-back solicitations offering him introductory 0% interest rates guaranteed for 12 months or sometimes 18.
He figured that if he took advantage of these offers, and remained true to his commitment to stick to a budget and not use the cards for any new purchases, he could tap these cards to pay off his parents and in the process cut his interest expense to zero. He might have to move some balances around and he'd have to accelerate repayment to be debt free before the teaser rates expired. He'd have to be extremely disciplined to not charge anything new. But, as he felt a decade earlier, he wanted to be financially free from his parent. So he took the credit card plunge again -- this time with a much better understanding of how borrowing works. He cut his already Spartan entertainment budget and dedicated any new money from pay raises and other sources to paying off the debt.
Within a few years his plan had worked and he was debt free. But the Hollywood ending was still to come. Curtis used his extraordinary first-hand knowledge of the credit card industry to launch a consumer-focused website called CardRatings.com, which was dedicated to helping students and others navigate the industry's confusing and often predatory practices. Curtis later sold that website for $10 million.
· 4 Lessons from the Curtis Arnold Story

4 Lessons from the Curtis Arnold Story
A lot has changed since Curtis' ordeal began in 1988. It's now more difficult for students to get a credit card and minimum payments are higher so that balances get paid down faster. But this industry can still prey on unassuming students.
What strikes me most about Curtis's story is that through it all he viewed himself as a frugal person. For the most part, he was charging only things he needed. So how did he get in so much trouble? It started with a general lack of respect for debt and insufficient knowledge about how credit cards work. But here are four specific things that put Curtis into a bind.

• No budget Curtis did not budget; he simply bought whatever he felt he needed with no clue as to how much he was spending at Wal-Mart or the grocery store. He never knew how much debt he was adding until he got his monthly statements. With a budget, he would have found that he didn't need quite so many "necessities."
• Poor use of cash Curtis told me that he never carried much cash. Still, if he had spent what cash he did have on needed items -- instead of whipping out the plastic -- he would have charged less and his real money would not have disappeared on things he can't recall.
• Counting too much on the future Like many young people Curtis had big dreams. But they were dreams; not reality. The big job and the big raise don't come automatically. College is not the ticket to a great salary that it once was. He was spending money that he assumed would come his way through later employment, but which did not.
• Living above his means At the end of the day, Curtis was simply living above his means, albeit at a level well below what most folks would consider extravagant. He talked himself into believing he deserved a certain lifestyle that he could not afford. This is the top way people get into trouble with plastic. It's just too easy buy things on a whim.