2 ‘“Why would banks give credit cards to students who have, at best, limited income?
Why would banks give credit cards to students who have, at best, limited income?
Credit cards are common sources of capital that enable people to realize their desires. They also offer the much-needed support during financial difficulties (Russell 34). Banks usually offer credit cards to employed individuals so as to be able to pay for the charges as well as settle their loans. Various credit card providers have lowered the maximum amount earned to qualify for a credit card. Some providers also accept unemployed individuals to apply for credit cards. In addition, several banks offer credit cards to students with limited or no income. This paper, therefore, seeks to discuss some of the reasons why banks issue credit cards to a student who have no source of income.
Despite being unemployed, students might have some sources of income especially from their parents, guardians or financial support from any source. Banks issue credit cards based on the students sources of income (Russell, 22). Most students receive educational funds to cater for tons of their personal and educational needs. Therefore, the bank groups such student as not employed but have a source of income through which they can settle their loans and pay for their credit charges. Moreover, there are students who might not be employed but have other sources of income like participating in community jobs where they are given a small amount for upkeep.
By considering different sources of income among students, the banks offer credit cards with restrictions to avoid any risk that might be incurred when the holder fails to settle their loans (Interest, loans and credit 1). For example, the banks can increase the interest rates to cover for any risks resulting from defaulting individuals. As illustrated in a study in United States banks, that sixty-three percent of unemployed cardholders, as well as students, owe money on their credit cards. The study also indicated that credit cards constitute forty-three percent of all consumer loans (Survey of financial security 8). Furthermore, according to the study, an average household owes up to ninety-five percent of their annual income. These statistics suggest that most credit card holders tend to borrow much from the banks to cater for disparate needs (Survey of financial security 1). Therefore, inability to settle the balance is a big loss to the bank hence the reason to raise student’s interest.
One of the reasons why banks issue credit cards to students is to identify and nature a potential customer (Russell 26). Most students after completing their studies land in good jobs some average or others end up being self-employed hence generating income. Therefore, most banks target the students by capturing their information for later use. Hence when applying for credit cards, they ignore their financial information like the amount earned and concentrate only on their personal information. They then use such information to keep in touch with the students in order retain them. The banks also offer efficient services to such students so that they don’t change a banking institution when they find a substantial source of income.
Another reason for providing credit cards to students is to increase their customer base. Although students, especially unemployed ones do not generate much income, banks offer them credit cards in order to attain a high customer base with the advantages associated with it. Large customer base provides a competitive advantage against the banks opponents, especially in marketing. It widens the banks marketing forum thus minimizing its expenses on marketing. The Large customer base is also ideal for ranking or examining a bank’s performance as far as financial stock is concerned hence an upper hand in national financial decision-making forums.
It is important to note that although students have the unlimited income of some of them have various sources of income (Clemmitt 24). Their income might not be bulky compared to employed individuals, but the accumulated income can surpass huge incomes from employed persons. Therefore, banks can tap into this accumulated income to increase its stock. Hence, they offer credit cards to students in order to attract their accumulated small incomes. Some students receive money on a monthly basis for their upkeep from their parents or guardians. The banks also expect to benefit from such money especially when the students use their credit cards to purchase commodities. Some students also work for a few hours and hence earn enough money for their upkeep. Such students are able to pay for their credit loans or any balance owed. Therefore, the banks consider such students as being valid to own credit cards.
Although credit loans are riskier compared to commercial loans, banks tend to lean to the side of credit loans because of its promising benefits (Russell 24). In addition, credit cards are also considered expensive to manage especially when dealing with a largely unemployed market such as students. However, the benefits that come with the market venture surpasses the losses doing it a lucrative business. Moreover, the banks offer loans to such market at higher interest rates compared to commercial loans (Interest, Loans and credit 31). Therefore, profits obtained from the credit card short-term loans given low-income earners like student inform of interest is significant to commensurate the risk involved.
Clemmitt, Marcia. Student Debt: Is the College-Loan System Fair? Washington, D.C: CQ Press, 2011. Print.
Interest, Loans, and Credit. New York, N.Y: Films Media Group, 2011. Internet resource
Russell, Thomas. The Economics of Bank Credit Cards. New York: Praeger, 1975. Print.
Survey of Financial Security, 1999: Economic Family File: [public Use Microdata File]. Ottawa: Statistics Canada, 2003. Computer file.