Members of generation plastic, particularly those under the age of 21, may soon find it more difficult to get approved for new credit cards. When the new credit card law steps into effect at the end of February, anyone under the age of 21 applying for a credit card must have a co-signer, or be able to demonstrate that he or she has the funds to repay debts incurred with the new credit card.
The new rules are part of the Credit CARD Act, which Congress passed into law in May of last year. The law contains a number of provisions seeking to protect young consumers, who in the past often have been lured in to signing up for credit cards without sufficient knowledge of how they work.
Young consumers between the ages of 18 to 24 years-old have been dubbed generation plastic, because they generally prefer to pay with debit and credit cards instead of cash. Unfortunately, despite their payment preferences, few have a full understanding of the ramifications of carrying high-interest credit card debt. Many students, in particular, get hooked on the credit card habit, while still in college, and often use high-interest credit cards to pay for tuition and other educational expenses as well as living expenses, a practice that seduces many into living beyond their means. Only 17 percent of students pay off the balance on their cards in full each month, and the average senior graduates with as much as $3,000 in credit card debt, according to a 2009 study by student lender Sallie Mae.
Credit card issuers have pursued college students aggressively in the past, partly because students are a lucrative market, and partly as a way to build relationships with tomorrow’s consumers. The hope is that the students will turn to the banks they already have a relationship with, when they need mortgages and car loans down the road.
The new provisions of the new Credit CARD Act seeks to protect young consumers by making it more difficult to take out new credit cards and limiting the way credit cards can be marketed to students on college campuses. Here are the main new provisions of the law:
1. Young adults under age 21 will need to either have a co-signer, such as a parent, or show that they have an independent means of repaying any debt they incur on a new credit card. If they have a cosigner, he or she must also approve any future increases in the card’s credit limit until the cardholder reaches the age of 21.
2. Card issuers will no longer be allowed to market student credit cards on college campuses by luring students in with offers of freebies; this ban also extends to sports events and other events, which are sponsored by the college, but not taking place on campus. Card issuers will still, however, be able to set up marketing booths on college campuses.
3. Colleges and universities will be required to offer greater transparency about so-called affinity credit card programs, which attract student applicants by using the school’s name. In these programs, the school receives a payment or a percentage of proceeds in return for letting credit card companies offer credit cards emblazoned with the school’s logo or mascot. Going forward, once a year, schools will be required to publicly disclose how much the school made from affinity card programs the preceding year.
4. Credit card issuers will no longer be able to send unsolicited, prescreened credit card offers to consumers under age 21, unless the person opts in for such offers.
5. The new law also urges colleges and universities, which allow credit card marketing on campus, to institute credit card and debt education sessions as a part of the orientation program for incoming students.
While the new rules are a good start, as always, it remains to be seen how effective they will be. In particular, young adults under the age of 21 may easily be able to skirt one of the most important of the new regulations, i.e. the requirement for a co-signer. Even after the new rules step into effect, anyone with a part-time job who can demonstrate a current income sufficient to repay debt on a new card will be able to take out a new credit card without a co-signer. For most college students, that will likely be a requirement not too difficult to meet.
