Credit cards: Source of freedom or costly burden?

When Trish Vandel ’04 applied for a credit card last year, she really didn’t need the $300 in extra buying power it gives her.

Her card — embossed with a leopard-print pattern matching the comforter on her bed — is for emergencies only, she said.

“I got it just in case I really need it,” she said, as she displayed the card in front of her bed so the matching patterns were visible.

Vandel reasons she cannot run into any serious credit trouble with a limit of only a few hundred dollars.

Regardless of her self-restraint, should Vandel or any of the other thousands of credit card-toting college students rack up a substantial plastic debt in the next few years, the shelter of personal bankruptcy protection will not be there to keep her out of legal trouble.

On March 15, the U.S. Senate overwhelmingly approved a bill that will overhaul the nation’s bankruptcy laws, giving more power to creditors and limiting the rights of consumers to file for bankruptcy should they default on loans or personal credit lines.

Following a year of unusually generous campaign contributions from the credit industry, the House of Representatives passed a similar bill, and President George W. Bush has said he will sign it into law as soon as it is ready.

The bill — which credit card companies and other loan issuers have been seeking for several years but did not materialize under the Clinton administration — would end debtors’ ability to use the bankruptcy system to erase credit card debt and other loans not grounded in homes or other assets.

While the legislation’s opponents said it will enable creditors to take advantage of unwitting consumers, supporters of the bill say credit collectors will finally be able to claim outstanding debts that are rightfully theirs.

School of Management professor Matthew Spiegel said on the whole, most people will be better off under the new law.

“Those opposed to the bill argue that banks shouldn’t be making loans to people [who can't afford to pay them] as a matter of principle,” he said. “But this bill may help people on the margin, because it will not be as easy for them to get away with defaulting … They will consider the ramifications before they apply for a loan.”

While some other SOM professors agreed with Spiegel, the bill has come under attack from those who feel it gives too much to credit card companies. Sen. Paul Wellstone, a Minnesota Democrat, did not agree with Spiegel’s appraisal of the bill.

In an interview with The New York Times, Wellstone said the bankruptcy system was meant to be a safety net for honest debtors.

“This bill is a wish list for the credit-card industry and a nightmare for vulnerable families,” he said.

Anecdotal evidence suggests that at Yale, most students do not have serious trouble with credit card debt.

Vandel said her primary problem with credit card companies is not debt, but rather the large volume of solicitations she receives each week in the mail.

“I get seven or eight a week in the mail at home,” she said. “I don’t respond to any of them, but they are annoying.”

Students also deal with the face-to-face solicitors Yale allows at athletic contests.

Companies offer students everything from Yale athletic wear to free phone cards in an attempt to sell them the little squares of fantastic plastic.

Katie Henderson ’04 said she signed up for an account with a local bank in Commons dining hall to get the free phone card they offered, only to cancel the account after the card arrived in her mailbox.

“I don’t sign up for them unless they give me something,” she said.

Spiegel said the new legislation will probably have little effect on Yale students.

“This whole thing is not really a question here, since most Yale students and graduates do not go bankrupt in the first place,” he said.

The legislation may even help them, he added.

Under existing law, individuals in debt can file for bankruptcy, preventing credit card companies and other loan collectors from seizing their property.

Because creditors will not lose as much money to bankruptcy under the new bill, they will be able to lower the interest rates on the loans and credit cards they issue to other consumers, Spiegel said.

“When you’re paying ridiculous interest on your credit card, you’re paying for the bankruptcies of other cardholders,” he said. “With this legislation you are losing some of the insurance you have in case you do go bankrupt, but overall this is a good thing for consumers.”

Many Yale students do not deal with credit problems because their parents pay the bills.

Stephanie and Kate, both freshmen, said they regularly spend “lots of money” when they go shopping, but send the statements to their parents. Both students asked that their last names not be used, lest readers think them irresponsible.

“I don’t go shopping that much, but when I do go, I’m serious about it, let me tell you,” Kate said.

Stephanie, like several students interviewed for this article, said the combination of credit cards and Internet access through the Yale network can be deadly.

“I do most of my shopping online,” she said. “It’s so easy to spend though. You just point and click.”

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