Congress wrote the new credit card law, the Fed laid out the rules for implementing it, and credit card issuers put the rules into effect. However, when it comes to student credit cards, somewhere between point A and C, key features of the new credit card rules appear to have gotten lost in translation.
The student card segment of the new Credit CARD Act was designed specifically to protect young adults under age 21 from falling into the debt trap early on. With this in mind, Congress drafted provisions specifying that those under 21 can only receive credit cards if they can demonstrate sufficient income, or get a cosigner for the card. It was left to the Federal Reserve to specify what constituted “sufficient income,” and how exactly it must be demonstrated.
The Fed chose to apply vague standards for evaluating income, simply requiring card issuers to have “financial information indicating the consumer has an independent ability to make the required minimum periodic payments on the proposed extension of credit.” The Fed explicitly declined to follow suggestions from consumer advocates that card issuers be obliged to only consider income earned from wages, as well as requiring a higher residual income or lower debt-to-income ratio for consumers less than 21 years old. The Fed also declined requests that card issuers be compelled to verify income or asset information stated on applications submitted by consumers under the age of 21.
Without specific standards for what it means to have an “independent ability to make required minimum payments” nor for proving such “ability,” it has been up to card issuers to lay down the policies. The outcome, not surprisingly, is a mixed bag of vague and lenient policies.
The upshot is that getting a student credit card in the post-credit card reform era appears to remain as easy as ever—with little else required than going online to fill out a credit card application, no co-signer required. Credit limits on new student credit cards range anywhere from $300 to $2000 or higher, and credit limits increase over time for anyone paying their credit card bills on time.
One major credit card issuer has set the “sufficient income” level for those under age 21 at a mere $2,000 per year. Applicants are allowed to include scholarships, grants, and parental contributions in that total. Since these sources of income for most full-time students would exceed more than $2,000; effectively any student under the age of 21 could be approved under that guideline.
Other card issuers don’t give specific income information in the online application material, nor guidelines for which sources of income are acceptable. In online chats, however, customer service reps from several card issuers specifically stated that personal income may include other income than employment income, including financial aid such as grants—and even loans.
As for verifying any stated sources of income, the verification process for that income appears to be as loose as the income requirements themselves. For example, when asked how proof of income should be provided, the customer service rep for one card issuer in an online chat replied, “On the application, put how much income you have in one year.” When asked if the card issuer would call for verification, the rep indicated that there would be no following up. Not surprising, since logistically speaking, card issuers don’t have the resources, nor the infrastructure, to pursue income verification in any serious way.
With rules and requirements like these, it’s only a matter of time before those in the 18 to 21 age group see through the charade of “stricter student card guidelines” and discover that applying for and receiving a student credit card is not all that much more difficult than it was before.
In short, for people under the age of 21, credit card applications in the post-Credit CARD era appears to have little to do with demonstrating “sufficient income,” but rather boil down to little more than an honor system. One need no crystal ball to predict that this will prove a poor restraint for those with no or low additional income, who are most likely to need the protections of the new law. With student credit card purchase APRs ranging as high as 23.99 percent variable, cycling scholarship, grant, or loan money already earmarked for something else through credit cards amounts to only one thing: an early lesson in poor financial management. Which, co-incidentally, was exactly what Congress set out to put an end to.