Credit Card Industry and University Students: A Convenient Consumer Group - Research Paper Example

IB- Credit Card Industry and University Students: A convenient consumer group Executive summary This research is about the credit card usage among the university students. The primary and secondary data has been utilised for the same. Primary research is done with the help of structured questionnaire. The students like to spend on the food and beverages, clothing and other retailing shopping. Some students spend on paying their fees as well. Majority of the students feel that credit card companies are approaching students often. They feel that it would be helpful if they receive educational information regarding credit cards and its use. Credit cards can offer various benefits to the students apart from the financial flexibility. Students can learn financial management through the credit card statements. They can be more organised and good planner for their budgeting. A good credit history will help students not only to extend their financial limits but also help those getting loans in future. The drawbacks of credit cards can be outnumbered with the benefits and disciplined use of the product. Table of Contents Executive summary I. Introduction II. Literature Review III. Methodology IV. Results and findings V. Analysis and discussion VI. Conclusions and recommendations VII. Bibliography and references VIII. Appendices List of Tables Table 1: Debit1or credit2 card spending: by type of purchase, 2002 Table 2: Schedule of Research Activities Table 3: Resource utilised List of Figures Figure 1: Gender Figure 2: Marital Status Figure 3 Age Group Figure 4: Credit Card Ownership Figure 5: Number of Credit cards owned by respondents Figure 6: Continuing Balance Figure 7 Advertising and Credit Cards Figure 8: Credit score familiarity Figure 9 Uses of Credit Cards Figure 10: The sector with maximum use of credit card among students Figure 11: Sources of information for financial management Figure 12: Impact of Use of Credit Card Figure 13 Credit Card Companies Approaching College Students Figure 14 Need of education of Credit card use Figure 15 Proper Information from the credit Card Issuers Figure 16 College/university campuses Help Figure 17: College and credit cards Company educating students Figure 18 Students View about attending such program I. Introduction I.i. Problem Statement In this highly competitive credit card business industry, university students emerge as a potential segment of maintaining or growing market share. I.ii. Research Objectives and aims Research Aim The aim of the study is to understand the process of opting and using credit cards by the university students in UK. Research Objectives To study the current business environment of credit card companies. To analyse the purchasing behaviour of customers through the credit cards To investigate the impact of use of credit card on the university students To explore various factors influencing credit card purchase behaviour for the university students To understand the impact of environment factors on credit card buying behaviour. To achieve all the above mentioned research objectives successfully with the focus on changing business environment I.iii. Background The global economy is facing a transition stage. The economic growth rate of the developed economies on one hand has slow down whereas for the least developing and developing countries it is increasing. In some developed nations the rate of growth rate of the economic growth has gone down. The credit card companies are facing various challenges in the matured markets like UK. The companies are approaching customers in as early stage as possible. As soon as students attain the age of eighteen years, they become eligible for the credit cards and independent for their financial decisions. Research Questions What is the demographic profile and purchasing behaviour of the university students? How informed are the university students for the credit card and its use? What are the impacts of advertising and promotional campaigns in the credit card industry? What is credit card ratings and understanding of credit card ratings among University students? What are the sources of information for the university students for their financial decision making processes? What is the perception of university students’ for the credit card companies approach? I.iv. Significance of the Study This study has significance in the current business scenario, when the companies are facing critical business challenges. It has become very challenging for the companies to sustain and maintain their market share. This study provides information on one of the potential customer segments. I.v. Limitations of the Study Time, finance, space and human resource were the biggest limitations for the researcher. Researcher has dealt with these challenges by incorporating changes time to time. II. Literature Review This chapter explores various studies relevant to the topic. This includes credit card market, consumer behaviour, students and use of credit card. II.i. Credit card Market Credit card is a modern era’s facility that provides financial flexibility to the customers. The studies conducted in the past ranges from general features of the credit cards, card issuers or service providers and merchants, different uses and abuses of credit cards and many others. A well known study conducted for the understanding interactions of consumers, merchants and card issuers in the past included three major categories consumers, merchants and issuers. The role of policy makers and financial institutions can not be ignored. Credit card companies operate in highly regulated environment. Merchant accepts credit cards from the credit card users. Chakravorti & To (2006) studied different factors related to merchants i.e. merchants have some level of bargaining power. They concluded that merchants have certain level of concentration in the marketplace for credit cards. Even a single merchant’s decision impacts the sales volume of the credit card in the market place. The conveniences offered to the customers are numerous. The risk of carrying cash or writing a cheque can be avoided. This becomes an additional payment options available to the consumer. Consumers need to pay their credit card bills within specified time limit to avoid late fees and surcharges on them. According to Chakravorti & To, 2006 thirty to forty percent of consumers pay off their full balances every month. These are regarded as ‘Convenience users’. Most of the service providers have tied up with Visa, MasterCard or even an American Express. Their cards carry logo of the associated card company. The same logo is visible on the most of the merchants and service providers’ locations and websites. Table 1: Debit1or credit2 card spending: by type of purchase, 2002 United Kingdom £ billions   Debit Cards Credit cards Food & drink 30.93 11.94 Motoring 13.92 11.51 Household 9.61 12.95 Clothing 7.07 5.42 Mixed business 6.52 7.04 Travel 5.99 11.70 Entertainment 5.07 6.23 Financial 1.32 0.60 Hotels 1.16 4.23 Other services 12.84 13.27 Other retail 12.59 16.89 Total 107.00 101.77 1 Visa and Switch cards only. 2 MasterCard and Visa cards only. Source: Credit Card Research Group Drawbacks of Credit Cards: According to Durkin (2000) “Credit cards certainly are widely used and accepted by the public. But they have also raised concerns in two areas: (1) whether consumers fully understand the costs and implications of using credit cards (the consumer information-consumer understanding concern) and (2) whether credit cards have encouraged widespread over indebtedness, particularly among the least able to pay (the indebtedness-financial distress concern)” On the other hand Lowe (2006) points out towards the abuse of the facility gained by a new credit card holder. The reasons given by Lowe are the human temptation to get more. In this process consumer tend to forget that they will have to pay whatever they are spending in the future. Any credit obtained will always need repayment and building a poor credit history can ultimately prove damaging to future finance applications. This is the reason why credit card company need to verify the background of the applicants and benefits offered to them. The various credit card options available in the market place include some standard cards which do not even require a regular stable income. For the credit card companies the profitable consumer segment is out of the ‘convenience users’ group. The customer who carries a balance, pay their bills late, surpass their credit card limit and fall into the additional fees segment is amongst the most profitable group. Saint Paul Foundation (2003) has provided a different perspective for the late payments and penalty pricing. According to this study penalty pricing in the form of higher interest rates usually imposed after sixty days of violations of the credit card agreement by the credit card holders compensates the higher risk to the credit card issuers on the other hand it increases the risk to the credit card user. III. Methodology III.i. Research Plan 1. Primary Research In the primary research, research has collected primary data with the help of structured questionnaire from the students of the surrounding colleges in Edinburgh. Research Paradigm Researcher considered different market groups and how credit issuers can target them. The targeting issue helped in understanding how students accept or reject credit card considerations. The paradigm helped in understanding credit usage pattern and knowledge of credit card among the respondents at the collegiate level usage. Data collection The data for this work was managed through a single questionnaire handed out to students married and unmarried attending a variety of campuses near the researcher’s location. The researcher utilized gender identifiers and numbers or letters to separate each questionnaire for validity and reliability of results and to ensure bias reductions. The questionnaire is located in the Appendix section for understanding of the questions. Sampling Definition of Population The population as identified by the researcher is above 17 years and is student of some university Specify Sampling Frame These are the people living in the Edinburg area. These people are users or potential users of the credit cards. Specify Sampling Unit Sampling unit consists of the credit card users of skin care category. Specify Sampling method Researcher has used the convenience method of the non probability sampling method. Non probability method is simple, quick and easy as compared to probability method. Determination of sample Size Sample size is determined on the basis of three factors time, cost, the feedback from the academicians and the scope of study. The sample size is calculated on the basis of following formula: Sample size = Where: Z = Z value The z value is taken 1.96 for 95% confidence level in this study. p = percentage picking a choice and is expressed as decimal Researcher has used 0.5 for sample size as required. c = It is the confidence interval in decimal c= .01 means results ±10) Total Population of Edinburg Students: 62,000 (source: Scottish Agricultural College website) Confidence interval level= 10% Confidence level= 95% Sample size=96~100 (Reference: Surveysystem.com) Schedule of research activities Table 2: Schedule of Research Activities S.N. Activity Lead Time 1 Identification of research topic, Background study, Problem Identification, literature review, exploring research methods and sampling 2 Weeks 2 Identification of research tools and secondary research 1 weeks 3 Developing Pilot study, conducting research with friends and colleagues 3 week 4 Quantitative research 4 Weeks 5 Compiling data and preparing of Tables and Charts 3 Weeks 6 Analysis of data 2 Weeks 7 Preparing research report 2 Weeks Activities, schedule and resources Table 3: Resource utilised Activities* Duration Start Date End Date Human Resource Place Equipment Cost / Pound 1 2 Weeks 1 September 2008 14 September 2008 Myself Home Stationary  50 2 1 weeks 15 September 2008 22 September 2008 Myself Home Stationary 50 3 3 week 23 September 2008 15 October 2008 Myself, friends Home Computer/Internet 100 4 4 Weeks 14 October 2008 14 November 2008 Myself contacted respondents Home Telephone/ Computer/Internet 50 5 3 Weeks 14 November 2008 7 December 2008 Myself Home Stationary 100 6 2 Weeks 8 December 2008 24 December 2008 Myself Home Computer/Internet/Libraries 50 7 2 Weeks 24 December 2009 7 January 2009 Myself Home Computer 50 Total   17 weeks       450 i. Reliability and validity Reliability for the researcher was achieved in the assurance that only a specified group of men and women were utilized in regard to the research. The focus was to contact students only. This gave the researcher focused view of the research goal. The validity was managed. The focused approach and emphasis on the considerations involved in the data collection variables, and sampling methods. Privacy and confidentiality methods included assigning numeric and alphabetic coding to each responding questionnaire. 2. Secondary Research The research is based on various resources. These resources are from different governmental websites, company websites and others. There are various researches conducted in the past. Researcher has tried to collect and integrate all the information. All the news websites used for the secondary research are well known and reputed. IV. Results and findings IV.i. Secondary Research As stated in the FSA study conducted on the student use and understanding of credit, parents usually try to avoid their children to opt for debt. Warren et al (2004) stated that parents try to teach their wards about the benefits of savings and different aspects of financial management. This is irrespective of source of income. Even when students are earning from part time, parents prefer them to save rather than getting into traps of debt. In an investigation conducted for the Ohio State University revealed that consumers with credit card debt also have health problems. These problems ranged from psychological to physical health. The financial anxiety which can be measured by debt-to-income ratios is related to variety of health problems ranging from heart attacks to insomnia and difficulty carrying out routine tasks. Paton (2006) states, ““More than 59,000 of these graduates are now believed to be in arrears on their loans and bad debts are estimated at about ₤163 million” Financial Times have conducted studies to understand debt patterns among the students and factors related to these debts. Crooks and Guthrie (2002) analysed the situation of the students using credit cards during their college life and situation once they complete their college studies. The findings were “Students typically run up debts of £10,000 to £15,000 each before popping champagne corks on graduation day. That represents a hefty contribution to the debts of young people, since more than 40 per cent now attend university or college, compared with just above 20 per cent at the end of the 1980s” (Crooks & Guthrie, 2002). In such cases students tend to take loans in order to manage their present with the hope that they will pay back once they are graduated and good job and this results in increasing debt over the time. Reeves (2005) have also conducted a study on the credit cards and its relation with financial discipline. According to Reeves, “Credit cards can teach students financial discipline and help build a good credit rating that will become important after graduation, when a car and, later, a house become important” But play it safe: Put a low limit on the card. Talk to the bank and make sure that the credit limit isn’t automatically increased if the bills are paid on time” (Reeves, 2005). Credit Card Search Organization points out one of the most important factor as eighteen year old student can get a credit card without parental consent or employment. This has accelerated the number of credit card users in the college level and increase debt of the students once they pass out of the college. As stated by Hayhoe (1999) carried out a research to study the attitude of students for the credit card behaviour. “Nine variables were significant predictors: the affective credit attitude, age, the cognitive credit attitude, gender, having taken a course in personal finance, borrowing from friends or relatives, the retention money attitude, use of money as a reward, and preparing a list before shopping (listed in order of significance) (Hayhoe, 1999) Synovate.com conducted a survey and divided the students in four broad groups. These are as follow: Group 1: This group comprise of 15% of the total students. These enjoy life full of luxury and comfort. This group of students have high purchasing power. They have relaxed attitude towards life and studies. They are not much concerned about the sources of money. They come from wealthy backgrounds and utilise their parents’ and family resources. Group 2: ‘Glamour Debtor’ is the group of 30% of students who live well in all the comforts and ease. This group owes lots of money. They are more inclined towards having money to spend rather than the feeling of debt burden. This is the group of influential students of the college. They love social gathering and spending. Group 3: “The Newdent” is fast growing group of students living with their parents. They form 25% of the total student groups. They are reluctant to debt as their sources of finances are limited and financial decisions get influenced by the family members or parents. They work as part timers in their weekends or evenings to meet their needs and sometime contribute to their families. Group 4: This is the group of ‘Student stressors’ They are 30% of the total students. They belong to the middle income families. They do not like to take any debt burden on them and are serious at their studies and work. The only acceptable area of debt for them is one which defines the very important factor of their life like fees for higher education, medical expenses and others. This group have least purchasing power and are occasional spenders. IV.ii. Primary Research Gender Sixty six of the total respondents are male and remaining thirty four are female. Figure 1: Gender Marital Status Twelve percent students are married whereas 88% are unmarried. Figure 2: Marital Status Age Group Majority of students are between age group of 17-25 years. Figure 3 Age Group Credit Card Related information: Credit card ownership: Seventy seven of the total respondents owned credit cards whereas twenty three did not have any credit card. Figure 4: Credit Card Ownership Number of credit cards Owned by the respondents Seventy four respondents who had credit card three or less than three credit cards. The number of respondents having more than seven credit cards was one whereas two had four to six credit cards. Figure 5: Number of Credit cards owned by respondents Continuing Balance on Credit Cards Twenty nine percent of the respondents were not sure about the continuing balance of the credit cards. 44% of the respondents had debt on their credit cards where as twenty seven respondents did not have any debt. Figure 6: Continuing Balance Advertising and Credit Card decision: Advertising has positive impact on the decision making process for the credit card. The number of respondents very strongly feeling that advertisement is impacting their decision making process was 12. Twenty two and twenty three respondents opted for option two and option three of the Likert scale. This signifies the impact of advertisement is strong. Figure 7 Advertising and Credit Cards Familiarity with Credit Score Sixty five respondents have knowledge of the credit score whereas thirty five were unfamiliar to the same. Figure 8: Credit score familiarity Use of Credit Cards The maximum number of use of credit cards were done for the food and drinks, followed by household, entertainment, clothing, other retail and other services respectively. The travel and hotel are the areas with least use of credit cards. Figure 9 Uses of Credit Cards The sector with maximum use of credit card by the students Students used credit cards for food and beverages more than any other sectors. Figure 10: The sector with maximum use of credit card among students Source of information for Financial Management Parents (67%) are the strongest source of information when it comes to financial management. This is followed by self learning, professors/teachers, employers, others, bank representatives, credit card issuers respectively. Figure 11: Sources of information for financial management Impact of Use of Credit Card Maximum numbers of the students find credit card use very positive. The numbers of respondents’ choosing option 1-3 are fifty six out of hundred. Figure 12: Impact of Use of Credit Card Credit Card Companies Approaching College Students Students feel that credit card companies are approaching students very often. The number of respondents opting for option one to three is fifty seven out of hundred. Figure 13 Credit Card Companies Approaching College Students Need of education of Credit card use Sixty six percent of the respondents feel that there is a need for educating students about the credit card use and abuse. 35% respondents do not feel any such need. Figure 14 Need of education of Credit card use Proper Information from the credit Card Issuers Forty five percent respondents feel they received proper information from the credit card issuing companies. The 32 % do not agree to the same whereas twenty three percent can not say anything about it. Figure 15 Proper Information from the credit Card Issuers Response on College/university campuses Help on Understanding Credit issues 88% respondents feel that it will be good if they receive information that can help them understanding the credit issues. Figure 16 College/university campuses Help Credit card companies and college administration in educating Students Seventy six percent respondents feel that credit card company and college administration can educate students in their financial management skills. Figure 17: College and credit cards Company educating students Students View about attending such program Ninety five percent respondents agree that they would like to attend such program which helps them learning about credit and financial management. Figure 18 Students View about attending such program V. Analysis and discussion The findings reveal that there would be adverse affects in the abuse of credit. The credit cards have impact on the daily lives of the collegiate students and in some cases they are utilising this facility for paying their college fees. Researcher absorbed information from the various resources and applied it to their personal financial decisions. The response of the questionnaires provided insight in regarding how many students have practical knowledge of the credit card usage and their financial management perspectives. Banks and credit card issuing companies can collaborate with college or can independently run some programs to educate students regarding financial management and use and abuse of credit cards. The merchants offering food and beverages in local areas can be approached by the companies in order to start some collaborative activities wherein students can get some benefits using the cards over there. In college and university level usually students come from diverse backgrounds and social groups. The level of understanding for the fiscal and financial responsibilities will varies among the student groups. Students from the middle income or lower income group will be more concerned towards their expenses and sources of finances and will be very scrupulous in their financial decisions whereas students coming from high income group or class may not have to be concerned about the sources of funds and payments of bills and loans. In any of the case it is important for the students to understand their financial responsibilities which can be done with the collaborative efforts of teachers, parents and to some extent the financial service providers. The advantages of credit cards usually outweigh the disadvantages of credit cards. Students are more vulnerable section for these services as they are easy catch and their needs and requirements for finances are unlimited. This series of questionnaires concerns different viewpoints to provide a more valid and expressive result. In so doing, inquiries were carried out by questionnaire for students, financial advisors and campus staff and professors. In regard to financial advisors, additional questions were managed including: whether the advisors would answer questions to the benefit of clients, whether explanations behind allowance or denial of credit are given, whether pamphlets and other methods of information exchange are managed for potential clients or students. VI. Conclusions and recommendations Credit card can help students learning financial management skill like planning budgeting and inculcating disciplined spending behaviour. The credit card statements will help students in learning and understanding various expenses incurred by them. They can learn to prioritise their expenses and budget appropriately. A good credit history will help these students getting future loans or extending their credit limits. It can encourage them to increase their earnings. There are certain drawbacks of credit cards like unlimited use of credit cards without concerning the ways of repayments. Despite the limitations spelled out in the fact that only college level students were considered and they were not divided by age group, only by gender, would in fact provide still an interesting view of financial management in regard to the use or abuse of credit. VII. Value to Management Students are a profitable segment for the credit card companies. They offer long term benefits and returns to the company. Credit card companies should focus on this particular segment and do efforts to change the mind set of parents as well. This can be achieved through educating students for their financial management skills and use and abuse of credit cards. The college administration can be approached and this can work as a branding exercise for the company as well. This particular study was small and isolated; to get a true picture of the affect credit has on students we must consider much broader horizons encompassing more than a single campus or even a single region. It will be only with these answers that we might find true measures in regard to student use and abuse of credit cards, student understanding of credit use and their needs in regard to personal finance management. VIII. Bibliography and references Associated Press, Washington. (July 17, 2006) Study Says Most College Students Have Credit Cards, CBS News. Brobeck, S. (1997), The Consumer Impacts of Expanding Credit Card Debt, Consumer Federation of America News Release. Chakravorti, S. To, T. (June 2006) A Theory of Credit Cards, p 2 & 15 Credit Card Debt. (February 2003) Helping the Consumer Become a Better Financial Manager; The Saint Paul Foundation Report Credit Card Service. (June 25, 2006) Educational Journals, WordPress; Crooks, E & Guthrie, J. 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(2006) Educating Undergraduates on Using Credit Cards, Article for Industry Professionals. Paton, Nic. (February 19, 2006) Graduates Avoid a Credit Blacklisting, The Mail on Sunday, London, England, p. 25 Reeves, S. (September 22, 2005) Better Budgeting for College Students. University Student Debt Problem; CreditCardSearch.org.uk; Copyright 2005; http://www.creditcardsearch.org.uk/student-credit-cards.html Warren, R et al. (March 2004) Young People and Financial Matters, Financial Services Authority, NOP Research Group. Xiao, J. J. Noring, F E. Anderson, J G. (1995) College Students’ Attitudes Towards Credit Cards, Journal of Consumer Studies, Vol. 19, pp 155-174 Associated Press, Washington. (July 17, 2006) Study Says Most College Students Have Credit Cards, CBS News. Brobeck, S. (1997), The Consumer Impacts of Expanding Credit Card Debt, Consumer Federation of America News Release. Chakravorti, S. To, T. (June 2006) A Theory of Credit Cards, p 2 & 15 Credit Card Debt. 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Appendix: Questionnaire Credit Card Use Questionnaire Students This questionnaire is for research purposes. No identifiers are being utilized. This is not for solicitation purposes in regard to banks or credit cards. It is a university research project. The questionnaire will take five minutes to fill. Kindly tick the most appropriate. You are 1. Male Female 2. Married Yes/No 3. Student Yes/No 4. Age Group A. 17-20 B. 21-25 C. 26-28 D. 29 and above 5. You own credit cards? Yes/No (If your answer is No, than skip to question 9) 6. What is the number of credit cards with you 1-3 4-6 More than 7 7. Do you carry a continuing balance on credit cards you have? Yes No Can not say 8. Do you understand credit card payment systems? Yes/No 9. Kindly rate the effect of advertisement on your decision making process for the credit cards? (1 for very strong, 7 for very weak) 1 2 3 4 5 6 7 10. Have you heard of credit score? Yes/No 11. Do you know your credit score? Yes/No 12. Where do you think you can use credit cards? Food & drink Motoring Household Clothing Mixed business Travel Entertainment Financial Hotels Paying college fees Other services Other retail 13. In the question 12, which is the area where you use credit card most often? 14. Who taught you financial management? Parent Professor/Teacher Bank representative Credit Card issuer Employer Others Self learning 15. Have you asked for advice before applying for credit card? Yes/No 16. How you rate the impact of use of credit card? (1 for very positive, 7 for very negative) 1 2 3 4 5 6 7 17. What do you think about credit card companies approaching to college student? (1-Very often, 7-least often) 1 2 3 4 5 6 7 18. Do you think you would you need to be educated for managing credit cards? Yes/No 19. Have you received proper information from the credit issuers on the use and potential abuse? Yes No Can not say 20. Do you believe that college/university campuses can help students understanding credit issues? Yes/No 21. Do you think credit card companies and college administration can work together in providing information on credit card use and abuse to the students? Yes No Can not say 22. Will you attend any such program? Yes/no Read More