Editorial Policy

Back-To-School Edition: Student Credit Cards in the Post CARD Act Era

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By Eva Norlyk Smith, Ph.D.
September 17, 2010

As election season approaches, the battle for Americans’ minds and hearts is heating up all over the country. Unbeknownst to most, on college campuses across the country, another battle is shaping up as well: the contest for students’ wallets in the post-Credit CARD Act era.

Students headed off to college this fall expect to find a different crop of credit opportunities than in previous years. In an effort to tackle the issue of mounting student credit card debt, the new CARD Act of 2009 put in place numerous new curbs on when and how card issuers can extend credit to those under 21.

The new rules have caused many parents to breathe a sigh of relief, and some students to rail against the new restrictions on their financial liberty. However, whichever side of the issue you might fall on, take heed: the way the new rules are being played out, while on paper student credit cards may appear to be taking on a new face, in reality, it’s likely to be business as usual.

Here’s a look at the new student credit card rules and how they are being implemented by major card issuers:

The new rule: A co-signer is required for people under 21 years old applying for credit cards, unless they can demonstrate sufficient income.

The reality: Large banks were quick to realize that managing a co-signer requirement would be a logistical nightmare, given the volume of credit card applicants they process. So while smaller banks and credit unions may require co-signers on credit card applications for those under 21 years old, online applications for major card issuers so far have no such requirements. Instead major card issuers have opted for compliance with the second part of the rule, relying on applicants below 21 to demonstrate sufficient income.

The new rule: People under the age of 21 applying for a credit card must be able to demonstrate sufficient income to pay the monthly credit card bill.

The reality: The term ‘sufficient income’, of course, is rather vague, and Congress left it to the Federal Reserve to specify exactly what constitutes “sufficient income” for credit card applicants under 21, and how exactly that income must be demonstrated.

Whether by intent or omission, the Fed opted to set very lax standards for evaluating income. Firstly, the Fed defined sufficient income as “the ability to make the required minimum periodic payments on the proposed extension of credit.” The Fed, in other words, went as far as creating an entirely new underwriting rule for student credit cards, disregarding the financial drawbacks of paying only the minimum on student credit cards earning interest as high as 23.99 percent.

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. Instead, the Fed rules require card issuers to have available “financial information” indicating the consumer has an independent ability to make the monthly minimum payments.

The upshot is that getting a student credit card in the post-credit card reform era appears to be as easy as ever. Little else is required than going online to fill out a credit card application and offer up a number for your income from wages and “other sources,” including scholarships and grant money. According to card issuers, credit limits on new student credit cards typically range from $300 to $2000 or higher, and increase with a regular payment history.

The rule: Card issuers are no longer allowed to solicit new customers directly on campus, and they cannot give out freebies to tempt students to sign up. In addition, colleges and universities no longer are allowed to give out student contact information unless the student opts in for receiving such offers. Colleges must also disclose any marketing agreements they have entered into with card issuers and provide financial literacy education, including credit card education, as part of the freshman orientation.

The reality: The reality of this rule is still taking shape on campuses all over the country. If you wish to see how it is being played out, follow the results of a recent investigation into the credit card marketing practices at New York state colleges and universities launched by New York Attorney General Andrew Cuomo. Cuomo is seeking to determine whether colleges are giving out personal contact information for students without their consent, and looking into marketing agreements for college affinity credit cards that may offer a kick-back to the educational institution. The findings will be interesting to follow, as they will likely reflect common practices in other parts of the country.