Literature Review about Credit Card Adoption

2.1 Introduction

The purpose of this chapter is to provide a review of the researchers that has been published in areas related to the topic. This chapter will begin with a discussion of dependent variable which is usage of credit card among IPTA and IPTS students. Along the way of discussion, some important issues and benefits are discussed to support the dependent variable. After that, it followed by the independent variables that affect the usage of credit card among IPTA and IPTS students which are demographic, knowledge, kind of purchases and attitudes. Furthermore, sub-variables also included under one of the independent variables. Both independent and dependent variables will be discussed in details in this study.

Besides, the research literature, along with related theory, will help to examine the potential relationship between the variable in this study. An understanding of how all the variables relate to each other is very vital as it will help researchers to understand how the perceptions and behaviors towards credit card usage among the students. The review also provides support to the objectives of this study and as guidance to the study’s design. Finally, it is followed by a chapter summary.

2.1.1 Credit Card Adoption

The review of the literature shows that many studies on credit card adoption are in the context of United States, Japan, and Australia. In this 21st century, credit cards have almost replaced the use of cash and personal cheques among societies. Credit cards are increasingly used to pay all the types of commodity regardless of the price ( Fianu et al., 1998; Soman, 2001 ; Chakravorti, 2003). Despite this, according to Durkin (2002), about 41 % of bank type credit card holders indicated that they owned three or more different credit cards. In addition, year 2001, there are about 72% families in 48 US states have their own credit cards, and about 20 % of them confirmed they had asked for additional credit cards for their own.

Based on the main use of credit cards usage and it benefits, credit card users can be categorized in two groups which are convenience users and revolvers (Lee and Hogarth, 1999). Convenience users tend to employ credit cards as an easy payment, typically pay their balance in full while receiving the statement. On the other hand, revolvers utilize the card as mode of financing and choose to pay interest charges on the unpaid change.

According to Zhao, Zhao.Y, and Song. I (2009), credit card lending is risky for card issuers because the loans are usually not secured by any assets. Furthermore, unlike traditional loans, which are discrete, typically involve an individual analysis of credit risk, and have a specific maturity date, credit cards invite a continuous flow of borrowing with limited subsequent checks of financial status after the initial issuance of the card. It is so important to card issuers to identify consumer risk types as early stage to prevent risky consumers from borrowing too much before default appears and customize their marketing strategies to different the customer groups.

Besides, credit cards also serve as an open-ended, easily available credit source (Lee and Kwon, 2002). When the credit cards consumers use the credit cards as mode of financing when they compete with bank loans and others forms of financing (Brito and Hartley, 1995). Credits cards allow their customers to borrow their credit limit without transaction costs. By this way, it can attract many consumers to pay high interest on outstanding credit card balances, rather than taking the time to apply for a loan with a lower interest rate. As a result, credit cards account for a substantial and growing share of customers’ debt (Canner and Luckett, 1992).

As the credit card is vital part of the financial and payment systems, it also used as a convenient payment medium in place of cash and checks and as a means of obtaining short-term revolving credit. According to Abdul-Muhmin, A.G. (2007), the study found that in some rich country or known as developing countries, the credit card ownership is so widespread among consumers that penetration rates are approaching 100 per cent. Credit cards also play important role in many part of developing world. For example, in Saudi Arabia, the credit card market has grown significantly over the past decade.

On consumer’s side, they have different ways for holding the cards. Through Kim,F. Dunn, and E.Mumy (2005), consumers have also different incentives to incur the time and psychological costs for searching the lower interest rates. By lower interest rates charges on credit card, this will make the consumers to use the card more frequently as their daily needs. Many consumers also value the uncollateralized credit lines for making purchases when their income is not arrive yet even at relatively high interest rates. Brito and Hartley (1995) mentioned that because of the limited alternatives to short-term uncollateralized credit, the demand for such credit may be fairly in-elastic with respect to price. Yet, Ausubel (1991) suggested that consumers may not even consider the interest rate when making the purchases because they do not intend to borrow for an extended period when they make purchases. However, they may change their minds when the bills arrive.

2.1.2 Credit Card Adoption among Students

As nowadays world, the use of credit cards among students has received much attention. According to Warwick & Mansfield (2000) indentified that credit card companies aggressively target college students because they are expected to have higher than average earning power and are seen by credit card companies as a desirable market. However, United State General Accounting Office (2001) further explanation with policy makers is concerned about this aggressive marketing of credit cards to the students. On the other words, credit has been linked to multiple problems in the college students such as anxiety, dropping out of school, filling for bankruptcy and even most important one is suicide ( Mannix, 1999; McMurtrie, 1999).

Feinberg (1986) mentioned that the more credit cards, the more likely the students are to spend more. This is because the students do not really understand on the financial implications of having a large numbers of credit cards and also carrying a large number of credit card debts. Furthermore, Kidwell and Turrisi (2000) noted that if students do not have enough money or they shy to borrow the money in their checking account to use cash, write a check, or use debit card, they were more likely to acquire a new credit card as well.

In a recent study of current college students and post-grads, credit cards were the third highest category for brand loyalty (Hein, 20003). This issue has contributed to a new form of “college credit” on campuses today. Between 70 percent and 80 percent that of all college students have at least one credit cards (Nellie Mae, 2005; Pinto and Mansfield, 2006). Nellie Mae (2005) further explains that college students carry an average monthly outstanding balance of $2,169 and graduate with credit card debt in addition to student loans. On the other hand, Pinto and Mansfield (2006) also estimated that fifty-nine percent of those who have student loans also have credit card debt. Since it is legal in most states for a 18 years old to obtain a credit card without parental consent or proof of employment, students may come to campus and obtain credit cards for the first time with little guidance on how to manage their debt (Lyons, 2004).

In addition to that, Faber & O’Guinn (1988) stated that increased in spending has been associated with increased debt. For example, there are forty-two percent of former undergraduate students who participated in the 2002 National Student Loan Survey reported that student loan debt was a major reason for not attending graduate school ( Baum & O’Malley, 2003). When the students find their credit card spending to be out of hand, they maybe force to leave the school in order to work part time as to pay their debt. Gallo (2003) mentioned that one large Midwestern institution was losing more students to credit card debt than to academic failure. The more serious things are some others have gone so far as to commit suicide because of credit card debt (Goff-Parker, 2006).

Last but not least, credit card usage among college-age consumers is consistent with today’s consumption-centered trend toward the rise of abstract forms of payment. Through Bernthal, Crockett and Rose (2005), the use of plastic is everywhere and credit cards have become a part from it as a lifestyle-facilitating technology. Yet, consumers can also utilize credit cards for their own advantage. To use a credit with more efficiently, consumers must bear in mind that they are encouraged to pay their balances in full at the end of the month to reduce the amount of interest charged and to keep balances from getting higher. Also, Manning (2000) defined 2 types of credit card users which are convenience users and installment users. Convenience users are individuals who pay their credit card balance in full each month, considered to be using their card wisely. On the other hand, installment users were described as individuals who carry a balance month-to-month, using the card as an installment loan.

2.2 Demographic

Gender

Gender has been found to be an important factor as to decide credit card debt of college students. According Armstrong and Craven (1993) examine the college students’ credit usage and payment practices and found that women had more credit cards than men do, but actually had lower balances on those credit cards, compared to men. A reason has been offered by others researcher. That is, women understand their credit cards better than their male counterparts, consistent with a study on students’ knowledge about debt from financial aid (Hira and Brinkman, 1992). Furthermore, they also found that student respondents, who were female, married, and older had a better understanding on their financial situations. Similar facts came from a study about the influence of a consumer education course on college students’ attitudes and knowledge. Carsky, Lytton & McLaughlin (1984) found that female and older students to show positive change in their behaviors, following achievement of a consumer education course.

Beside that, Hayhoe, Leach, Turner, Reuin, and Lawrence (2000) also mentioned that another study regarding gender and credit card usage was carried out. They tried to identify the differences in spending habits and credit use of college students. Their path analysis model showed that there was a significant difference in the financial practices and financial stressors of male and female students. Lyon (2004) also found the same similar results in the recently study. But, Munro (1997) made a different argument in her master’s thesis with the coefficients on gender and the numbers of the credit cards owned were insignificant in predicting credit card payment practices in the logistic model.

Lyon (2004) also identified that financially at-risk college student; females do not appear to hold excessive amounts of credit card debt because they do have a problem making payments on time. Yet, Hayhoe et al. (2000) also reported that in term of making minimum payments there are no gender differences.

Race

Race also plays an important role in predicting the credit card debt of college students. According Armstrong and Craven (1993), race is to be significantly related with the number of credit cards a student owned. On average, white students owned 3.4 cards per person compared with black students only with 2.3 cards per person. International students have the fewest cards with an average of 1.4 cards. In related studies, black students were found to feel more pressure when dealing with their financial situation compared with their white counterparts (Archer & Lamnin, 1985; Murphy & Archer, 1996).

Furthermore, similar studies found that black students to be more worried about paying their monthly credit card bill compared with the white students (Brobeck, 1992). Munro (1997) also commented that white students are better at managing their debt and using their cards than those black students. Lyon (2004) also found that white students are more likely to make their credit card payments than black students do.

In the study of Louisiana college students, according Lawrence et al. (2003) noted that 45% of the card holders were Caucasian, 23% were African American, 19% were Asian, about 6% were Hispanic and the remainder were Native American or other race and ethnicities. This percentage reflected the race and ethnic distribution in the overall student body, suggesting that ethnicity was not a factor in distribution of credit card holders on the campus.

Age

As for the age, there is limited literature on college students’ ownership of credit cards. These because most of the research divides people into some several groups. As compared to grade students to teenagers, grade students are more to be able to learn money management practices more efficiently from their parents (Garmen & Bach, 1995). This follow by a college student will be more likely to be poor money manager if their parents are poor at managing their money. According to Brobeck (1992), he studied the effect of age on attitudes towards credit cards. In addition, he also found that younger card holders worried about paying the minimum monthly credit card bills. Specially, high school students in college wanted to understand more about their rights as credit card holders, as well as how to access information on their credit history.

According Schwarz (2003), age plays a very vital role in the consumer decision making process. Based on the particular age group, consumers lean to support their decisions on different sets of values and as a result they will behave differently (Peterson, 2007). Previous studies also examined that the influence of age as a continuous variable. And, through Hamilton and Khan (2001) found that support that age has a negative relationship with outstanding credit balances. However, Kim and DeVenay (2001) found that age follows the life-cycle hypothesis pattern (Ando& Modigliani, 1963) and as a result it affects relationship with outstanding credit balances. Kim and DeVenay further said that the probability of being a credit card revolver increases until around age 37 and it will decrease after that onwards. This finding suggest that younger consumers are faced with financial obstacles, such as lower-paying and high expenses of raising a family, so there is a stronger incentive to borrow. Based on all of these findings, it is rational that older consumers are more likely to be credit card convenience users than the younger ones.

Academic year

Senior students have been found that spend more money and show less concern over their budget as compared to the freshman (Anderson, Camp, Kiss, Wakita, Weyeneth & Fitzsimmons, 1993). Furthermore, through Munro (1997) found that freshmen and sophomore who acquired cards before college will make a better use of their credit, compared to minorities, juniors or seniors , graduate students, those who acquired their cards during college, and those owned more than three cards. In particularly, how near one perceives their entry into the labor force, this will lead to the greater their use of credit.

On the other hand, some researchers seem to have the opposite view on these methods. In one such study, upper-level students and those who lived off-campus exhibited greater knowledge about their credit cards and general finances than lower-level students and those who lived on-campus (Danes & Hira, 1986). As a result, academic year demonstrates mixed results on college students’ credit card debt.

2.3 Knowledge of financial issue

The ability of manage personal finances has become very important in nowadays. People ought to know that they must plan for long-term investments for their retirement and also for their children’s education. On the other hand, they must also decide on their short-term savings. Such as do some borrowing for a vacation, a down payment for a house, a car loan, and other big-tickets items. A part from that, they must also know how to manage their own medical and life insurance needs. According to Markovich and De Vaney (1997) found that male college seniors scored higher on financial knowledge test than female students. They did not explore gender differences in financial practices. As we know that male is more use to understand about financial knowledge because they are less spending that women do. Men also were more satisfied with their financial situation than women (Lytton and Grabe, 1997).

There are two lines of research on financial knowledge. In one group of studies, participants answered questions related to general financial knowledge (Markovich & DeVaney, 1997; Chen & Volpe, 1998; Avard, Manton, English, & Walker, 2005; Jones, 2005). The questions that used in these studies related closely to the topics typically covered in an introductory personal finance course. And the second group of the studies used specific financial knowledge as a proxy for financial literacy (Warwick & Mansfield, 2000; Joo et al., 2003; Braunsberger et al., 2004). These studies generally asked individuals to report particular facts about their own credit cards.

Beside that, Chen and Volpe (1998) administered a 36 question survey dealing with various aspects of personal financial knowledge to college students. The average score of the correct responses was close to 53%, not a passing score on a typical grading scale. They noted that significant degree-type and class rank effects. Business majors tended to score better than non-business majors. Also, students with more years of college had higher financial knowledge scores than students with fewer years of college. Other researchers have also found that college freshmen have low scores on tests of financial knowledge. Avard et al., (2005) found that college freshmen were able to answer only about 35% of financial knowledge question correctly. Jones (2005) reported that on average, incoming freshmen gave correct answers only 56% of the time by using a six-question scale of credit knowledge to evaluate financial knowledge.

Furthermore, the ability of cardholders to report his or her annual percentage rate (APR) is one of the way to measures of specific financial knowledge. Through Durkin (2000), Hogarth and IIilgent (2002) noted that awareness of APRs has grown significantly in 1968. In spite of to this method, research also indicates that few consumers seem to understand how to use the APR to make effective financial decisions (Lee & Hogarth, 1999). Same results as Chen and Volpe (1998) discovered that 67% of the college students surveyed could not correctly answer a multiple-choice question regarding the APR.

As according to Liebermann and Flint-Goor (1996) suggested that previous knowledge of an issue is one of the most essential factors that influencing information processing. Also, the results differ in depending on how financial knowledge has been measured, what behaviors have been studied, and what populations have been analyzed (Mandell, 2004; Peng, Bartholomae, Fox, & Cravener, 2007).

Findings of some studies suggest that life-cycle stage may also influence the perceived salience of individual financial instruction. Mandell (2004) stated that having a savings account has been associated with higher savings knowledge among high school students. This because by savings account can make the students get to understand more on their budgeting. Through this way, they will not simply spend that will exceed their means. However, using of credit cards has been related with lower credit knowledge among college students as well. By using the credit cards, students can also spend whenever they want to. With simply spending will make their knowledge of credit also become weaker. Besides that, Peng et al. (2007) also noted that both high school and college students that finished a personal finance course displayed improved savings rates following a personal finance course.

2.4 Kind of purchases

Nowadays, college students are more likely to spent especially female college students. As every day, shopping mall will be fully with females than males. And probably that student in their third year or final year pretend to had higher level of money than the students which is in foundation or second year (Davies and Lea, 1995). This is because that final year students have more wide knowledge on how to spend and they will spend more than the smaller ones do. For example, the kind of purchases that usually college students do are; clothing, electronics, entertainment, travel, educational expenses, online transaction, and automobile expenses. Probably clothing is the most purchase among college students (Armstrong and Craven, 1992; Makela et al.1993; Sholten, 1981). Clothing is the most favorite goods among college students due to trendy trend improve from day-to-day. On the other part, students also choose to use online transaction as one kind of their purchases by using credit card. According Kim and Park (1999) showed that benefits of internet transactions such as time savings and convenience will enhance consumer purchase intention by the internet.

According Xiao and Noring (1993), in an examination of reasons for saving, found that female heads of household were more likely to save for daily expenses; they appeared to focus on the most basic level of financial need. In contrast, male heads of household were more likely to save for retirement, for their children, and for growth. There was a similar pattern for level of resources in the study, suggesting that female-headed families saved only for the most basic needs because of their limited incomes. On the other hand, Williams (1991) discovered that men are less likely than women to have a budget, keep financial records, plan order and sequence of spending, set aside time for financial management work, pay finance charges, carry through financial plans, and shop for best buys. In other word, women were less likely than men to estimate expenditures, to figure net worth, and to always coordinate activities.

2.5 Attitude

Usually attitude somehow can define as positively related to behavior. According to Ajzen & Fishbein (1997) revealed that some evidence for weak relations between attitude and behavior appearing in the 1930s motivated many researchers to question the assumption that attitude influences behavior. For example, people who have good attitude leads them act with a nice behavior on themselves.

Through social psychology, there are at least 3 different kinds of attitude theories, and each of them recommends a different relationship between attitude and behavior. Fishbein & Ajzen (1975) proposed theory of reasoned action that assumes behavior can be predicted from attitude. This theory mention that when people make choices, they form their attitudes based on their beliefs about attributes of an object. In other words, people also form a subjective probability to estimate the attributions of an object and then they influence their evaluations of those attributes along a dimension from excellent to bad.

Festinger (1957) proposed another theory that is cognitive dissonance theory. This theory is to reduce the cognitive dissonance occurring when people’s belief system and their behavior are not consistent; they tend to change their belief system to make it able to explain for their own behavior. Thus, in this case, the formation of attitude or belief is based on behavior.

Furthermore, Krugman’s (1965) indicated that hierarchy of effects, this show how the relationship between attitude and behavior would differ depending on whether people have high or low involvement and the object is distinctive or not. Behavior is based on attitude if people have high involvement and the object is distinctive. On the other hand, attitude is based on behavior if people have low involvement and the object is distinctive. As a result, attitude and behavior is not related if people have low involvement and the object is not distinctive. For example, a distinctive object would be an automobile while object that not distinctive can be a notebook.

As previously studies, Xiao, Noring, and Anderson (1995) were among examine the college students’ attitudes towards the credit card usage. They also found that students attitudes towards credit cards most likely to be male, living at campus, and majoring in consumer affairs. Students with the credit card are usually utilize their cards more frequently and also were signed by their parents all the bills they had paid. Through the researchers, effective credit program must commence for those students to find the way to change their attitudes about credit so that they will understand more on how to use their credit more usefully.

Beside that, Joo, Grable, and Bagwell (2001), also examined the factors related with students’ attitudes towards credit cards as well as students’ credit card usage. They use sample of 250 students from university in southwest state, found that 70.7 % of the students at least own one of their credit card, and more than 10% holding their five or more that that credit cards as well, and almost half of the students paid their credit card bills in full payment each month, and lastly 10% only of the students make the minimum payment each month. As conclusion, the positive attitudes towards credit cards is come from those students who had the cards, in a lower academic year, their parents also having the cards too, and their parents who do not have any problems on their financing system.

Money attitudes

According to Yamauchi and Templer (1982) had developed a psychometric money attitude scale that measured five factors related to the attitudes individuals hold towards money. These factors were power/prestige, retention time, distrust, quality, and also anxiety. They also found that money attitudes to be independent of a person’s income.

However, there are also some related research has been conducted on credit and money attitudes. This can see through Tokunaga (1993) studied two groups of credit card users, those who had experienced severe financial problems and control group who had not experienced such problems. Attitudes towards money were measured using a scale similar to the one developed by Yamauchi and Templer (1982). Tokunaga found that serious users of credit cards viewed money as a source of power/prestige, experienced more anxiety about financial matters than the control group, and were less concerned about the retaining money as well.

Forman’s 1987 Money Madness Scale was found in need of further work to improve its reliability and validity (Fumhum, 1996). Yet, Tang and Gilbert (1995) define that Tang’s 1992 Money Ethic Scale also displayed marginal reliabilities for five of its six sub scales. The most common ground among the above money attitude scales was found between Yamauchi and Templer’s 1982 Money Attitude Scale and Fumham’s 1984 Money Beliefs and Behavior Scale (MBBS). Both scales produced dimensions relating to money as a tool of power, budgeting/retaining money, anxiety regarding money, and money obsession. This obsession with money was a component of the power-prestige dimension of the Yamauchi and Templer scale. And also Fumham’s 1984 MBBS included a sixth factor, which measured the subjects’ perspective on how intimately one’s efforts are tied to his or her financial well-being.

Risk

Greater information detail with products of high complexity can be associated with greater perceived risk as well as the need for more control too. Risk is often viewed as an antecedent of involvement especially when the price is high and the consumer’s risks losing money. For the strong competition of credit card lenders in the 1990s induced them to propose credit cards to riskier households. According Black and Morgan (1999) stated that credit card holders became more risky customers from time to time. And, they also mentioned that in year 1995 cardholders were poorer, single status, carried high balances credit card, and had a high debt ratio.

As nowadays world, the impressive use of credit card among college students has make some concerned that students’ credit card behavior is putting them at bigger risk for high debt levels and also the misuse of credit after their graduation. These concerns also effect to the rising of college costs and also the recent economic slowdown. According Crook (2001) found that consumers demand less debt when they are relatively risk averse. The study also recommended that consumers may be cautious of paying more for purchase as a result of additional charges of interest. On the other hand, Duca and Rosenthal (1993) showed that when consumers are risk averse, there are many financially-struggling families demand more household debt, such as credit cards. This is because some of the consumers may scare of committing to a formal bank loan, such as housing loans and also automobile loans that make them feel the investment are too high for them.

Furthermore, Hazembuller et al. (2007) also found that credit card revolvers as a credit card user that who had low-risk tolerance. The researchers further explains that consumers with low-risk tolerance are more likely to feel that credit cards provide low-risk credit chances while consumers with high-risk tolerance are less likely to view and use credit cards as debt because they feel they have better opportunities with other loans. As conclusion, high levels of risk tolerance may have a significant positive impact on being a convenience user.

In addition, risks of the credit card among students incur also when they utilize the card for the online transactions. According to Kim and Park (1999) they showed that benefits of internet transactions such as time saving and convenience enhance consumer purchase intention through the internet. On the other hand, risks associated with internet transactions such as delivery risk and payment risk discourage consumers from buying through the internet. This previous research suggests that if consumers perceive the risks related to product quality, purchase method, payment, and service with regard to online buying, they may circumvent the internet and choose offline channels for product purchase even after they have searched information through the internet.

Nowadays, people live in times of increasing dynamism in the natural, social and business environment, and as a result the discipline of risk management is in the ascendant (Smallman, 1996). Risk measurement has been a controversial issue (McCarthy, 2000). The value of Internet commerce to the customer is an important construct for academics and practitioners alike. From this point of view, when a firm uses the internet to engage in E.C, it exposes itself to security risks, who fall into three general categories: client/server risk, data transfer and transaction risk, and virus risk. Basically, the term risk defined as the probability of a negative outcome occurring from some course of action (Liles, 1981). Hertz and Thomas, (1984), continued to define risk as a lack of predictability about the outcome of a problem, or to a lack of predictability about the consequences of a decision. Security and privacy issues are particularly important in the B2C area, though privacy protection measures are constantly being improved. Researchers have not examined the effects of risk across all stages of the consumer buying process.

Perceived control

According to Ajzen (1991) said on theory of planned behavior, a person’s behavior can be predicted by his/her perceived control of performing desired task. Control is achieved through relevant resources and opportunities for performing a given behavior (Madden, Elle