August 26th, 2009

Credit CARD Bill of Rights For Young Consumers

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When the Credit CARD Bill of Rights Act goes into full effect February 2010, special provisions aim to safeguard consumers under 21 from getting in over their heads with credit card debt by placing restrictions on how credit card companies market and issue credit cards to young people. With college-aged students graduating with an average of $2,292 in credit card debt and an average credit score of 636, the protections built into the Act, especially for consumers under 21, help young people develop healthy credit habits and graduate with a clean credit report.

The Bill steers the relationship between credit card issuers and consumers under 21 in a more positive direction. Understanding that college students are typically inexperienced with credit cards, the Bill introduces new rules for credit card issuers to abide by when issuing credit to young consumers including limiting total credit extended, requireing a co-signer, limiting total fees associated with a new card, and forbidding card issuers popular unsolicited gifts for application on campus. With added speed bumps to keep young consumers from taking on too much credit, training wheels with a parent on board, and making campus sidewalks closed course once again, the following provisions help build a foundation for young consumers to manage credit wisely.

Stricter limits on access means more protection

credit card

Persons under 21 cannot hold a credit card without a co-signer over 21, such as a parent or guardian, or proof of independent financial means of being able to repay credit extended by a credit card issuer. Also, a credit card issuer and its affiliates cannot issue more than one credit card to the same student.

On average, a college student has 3 credit cards stashed in their wallet by the time they graduate and nearly $2,300 in total credit card debt. The extra step of soliciting a co-signer or providing proof of income, to ensure they have the financial means to pay off their credit card bills on a consistent basis, should help young consumers keep debt in check and think twice about the responsibility of using a credit card.

Be warned Mom and Dad: agreeing to co-sign a credit card means the co-signer assumes shared liability for the account and must pay-off the account in the event of default. Both positive and negative actions taken on the student’s account becomes a permanent part of a co-signer’s credit history and will be reflected in the co-signer’s credit report as well.

Unless a parent or guardian signs as the primary accountholder, a person under 21 cannot be given a credit limit more than $500 or 20% of the person’s gross annual income, whichever amount is less. A person under 21 with multiple credit cards cannot exceed a combined total of credit limits more than 30% of the person’s gross annual income. Also, credit limits cannot be increased without the authorization of the co-signer.

It takes time and experience for young consumers to learn the financial savvy of how to budget, handle credit, and deal with debt responsibly. Having a lower credit limit provides young consumers with access to credit so they can build credit history, but in a limited fashion so as not to put themselves into a situation of insurmountable debt. Access to credit at a young age is important as both length of credit and on time payment history are key components that influence a consumer’s credit score.

Total fees in the first year of a new credit card—including application fee, annual fee, and more—is limited to 25% of the student’s limit.

This provision reminds young consumers to be credit-conscious and fiscally responsible for the financial actions they take; all consumers alike, not just new cardholders, should always read the complete terms of service and fine print of a credit card application to check for any hidden fees or penalties that could cost you up to 70% of the credit card’s limit. Credit card issuers tend to offer college students lots of attractive promotional offers with introductory terms, so be sure to shop around and compare to find the best terms and rates for the long haul before signing accepting any credit card.

No more peddling credit cards on campus

college

Credit card issuers are prohibited from unsolicited marketing on college campuses. This includes any pre-screen offers, incentives, and tangible gifts often given to students, such as t-shirts, complimentary food, coupons, on campus in exchange for filling out a credit card application.

Barring issuers from campuses and college-sponsored events limits them from having easy access to college students who are often inexperienced with handling credit. Too often college students are lured by the free movie passes or school T-shirt only to find themslves with a credit card that has high interest rates and high annuual fees. All consumers should shop around and find the right card for their situation. For young consumers, often a student credit card or a secured card is the right product to help start building their credit.

College students who hastily agree to credit card agreements that come with freebies often find themselves stuck with high-interest rates or miscellaneous fees. Students should instead apply for the student credit card or maybe even a secured card that is right for them as opposed to the one with the best incentives.

There must be full disclosure of any “affinity agreements” between issuers and colleges. Campus marketing agreements between the two parties must be publicly disclosed and reported to the federal government.

In the past, affinity agreements have enabled issuers to market credit cards to students with unfair and unreasonable policies advertised in an enticing way, taking advantage of studnets. This provision gives greater transparency to students and alumni regarding the financial relationships between each college and the issuer of the affinity cards. While most affinity programs make a majority of their revenue from alumni, the additional transparency is a healthy provision for all.

In spite of the recession and the credit crunch, credit card issuers remain in hot pursuit of college students as new customers; additional protections provided by the CARD Act are welcome additions on campus. Credit Health and Personal Finance should be required courses for all majors, each providing young consumers the credit know-how to make informed decisions and step into the real world armed with a good credit score and healthy credit habits.

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5 Comments

  1. I am 19, got my first card when I was 18. On no income, I’ve went from 1 $500 card to 4, one with a $5000 limit, and a total limit of $9250. My creditkarma score is 742.

    I don’t like these rules. I managed to use credit wisely and pay them off with the help of scholarhip and grant money.

    The markets know better than the government.

    John at 5:47 pm on August 26, 2009
  2. How’s this law affect people such as John who already have credit cards, don’t have income, don’t want a cosigner, and won’t turn 21 till after February?

    John: Good for you, you know how to not be exploited by the credit card companies. Doesn’t mean said companies should be permitted to exploit your fellows.

    EllieMurasaki at 7:22 am on August 31, 2009
  3. Thanks Ellie. First day of September, my CK is up to 756 o_O I also just reduced my debt from 19% to 9% of $9250, I wonder how that will play out.

    John at 8:12 am on September 1, 2009
  4. 754, same difference.

    John at 8:16 am on September 1, 2009
  5. I’m 25 and have a FICO score of 788, thanks largely to being able to establish a credit score starting at 19. My younger sister got a bunch of cards at 18, decided they were free money, defaulted on all of them, and still has a credit score in the toilet at 21. I would not cosign for her in a million years, though I did recommend that she get a secured card if she wants to repair her credit so she can get a cell phone or rent an apartment. But then again, back in ’05 I got my credit limit raised from 2,000 to $20,000 without even asking for it but I didn’t abuse it and continued to pay them in full every month. Not all 18 year olds are financial morons; it really depends on the individual.

    LL at 11:03 pm on June 5, 2010

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