The Credit CARD Act of 2009 is widely recognized for introducing important new consumer protections – one of which was to prevent students under 21 from racking up debt.
However, some credit card issuers have found ways around the new regulations to continue to market cards to young adults.
This is one conclusion of a recent report on the current state of student credit card marketing by Eboni Nelson, an associate professor at the University of South Carolina School of Law.
“Overall, it appears that the Act has not significantly achieved its goal and made sure that students are getting the protections they need,” says Nelson. “Two years after the implementation of the Act, we're still seeing many of the same aggressive marketing tactics, and the eligibility requirements for student credit cards continue to be set very low.”
The CARD Act set forth provisions restricting access to plastic by young adults under 21 unless they could either show sufficient proof of income or have a qualified co-signer on the card.
When it comes to student credit card marketing, Nelson found, the implementation of the Act falls short in several ways:
1. Low standards for “ability to pay” credit card debt
One of the CARD Act's central goals was to curb issuers' tendency to extend credit to college students without consideration of whether they had the financial means to repay the debt. The Act requires card issuers to ensure that young consumers under the age of 21 either have a co-signer or provide proof of sufficient income to qualify for a card.
In its interpretation of the Act, however, the Federal Reserve Board chose to define young consumers' “ability to pay” as the ability to pay the minimum monthly credit card payments. The upshot is that someone who is able to pay $40 per month can be qualified to take on credit card debt as high as $2,000.
With student credit card annual percentage rates (APRs) as high as 19 percent, a student who pays only the minimum monthly payment on a $2,000 balance could spend 15 years paying it off — and pay an estimated $2,500 in interest charges.
“It's very, very easy for someone to qualify for paying $40 per month as opposed to paying a $2,000 credit card balance,” says Nelson. “But this is a very expensive way to use credit cards. Unfortunately, most young consumers tend to revolve balances and pay a lot in interest charges and fees. This makes them very attractive to card issuers.”
2. Grants, scholarships and possibly student loans considered income
The CARD Act requires card issuers to verify that consumers under 21 applying independently (without a co-signer) for a credit card have independent income to pay the credit card bills.
Unfortunately, exactly what is meant by independent “income” is rather vaguely defined. Citibank, for example, told AOL's DailyFinance in 2011 that “allowances, stipends, grants or scholarships” can be considered as income for eligibility purposes. In informal online chat sessions with this writer, customer service representatives for Capital One and Discover have repeatedly set out the same guidelines.
“People assume that income means you need to have a job,” says Nelson. “But you have large banks like Citibank admitting that they allow grants, scholarships or even student loans to be considered as income. Most importantly, there are currently no provisions in the CARD Act or its accompanying regulations that prohibit such consideration.”
How common is this practice? In a 2010 study by Professor Jim Hawkins of the University of Houston, 29 percent of the 338 undergraduate students surveyed said that they had used student loan proceeds as part of the income reported to card issuers when applying and getting approved for a credit card.
3. Aggressive credit card marketing practices remain
Section 302 of the CARD Act stipulates that credit reporting agencies can't send credit reports of consumers under 21 to card companies unless they “consent to the furnishing of such report.” In other words, young consumers have to opt in to have their reports sent to card companies. This rule was intended to prevent the credit card companies from sending “preapproved” offers to students in the mail.
However, the rule applies only when issuers obtain young consumers' information from a consumer reporting agency and then offer them a preapproved card, according to Nelson. It does not apply to “invitations to apply,” which are not pre-approved offers. In other words, issuers are still entitled to send credit card solicitations to students whose information they acquire through educational institutions and other marketing partners.
In addition, the CARD Act prohibits credit card companies from marketing on campus and offering freebies (like T-shirts) to students who apply for credit cards. Yet credit card companies can still reach students via other means — like email and Facebook — and tempt them with bonuses like discounts, reward points or promotional terms.
Indeed, surveys indicate that issuers continue to solicit college-aged consumers via direct mail and other means. In the 2010 University of Houston survey, 76 percent of the student respondents reported receiving a credit card offer in the mail since the beginning of 2010.
Nelson says she hopes that the Consumer Financial Protection Bureau, a federal watchdog agency formed in July 2011 with the authority to enforce the CARD Act's provisions, will address some of these issues.
“While there have been improvements in some areas of student credit card marketing, there's still a lot of work to be done if young consumers are to get the protections intended,” she says.