Students, credit cards and the new reform law: The fine print
Details of changes in marketing of, access to student credit cards
By Jennifer Acosta Scott | Published: September 30, 2009
Come Feb. 22, 2010, credit cards will be a whole new ballgame for the under-21 set.
Young adults and credit cards:
Law brings big changes
Beginning in February 2010, young adults' access to credit cards will be curtailed, as will credit card marketers' access to students, as part of a far-reaching reform law. CreditCards.com looks at how the changes will affect the industry, parents and young adults.
That's the date that major provisions of the Credit Card Accountability, Responsibility and Disclosure Act of 2009, also known as the Credit CARD Act, will go into effect. Signed into law on May 22, 2009, the act mandates a number of reforms for the credit card industry, such as limiting when banks and other issuers can increase annual percentage rates (APRs) and giving cardholders more time to pay their monthly credit card bills. The law also includes several measures aimed at protecting young consumers and college students, who until now have been bombarded with offers of easy credit.
"Young people thrown on college campuses can be extremely vulnerable to these practices," says Brad Lazarus, principal at Omega Advisors, a Chicago financial planning firm.
So what changes can students expect in February? Here's a breakdown:
Higher barriers to credit approval. The days when jobless students could get credit cards without Mom and Dad's approval will soon be over. Student applicants under 21 will now be required to have co-signers, such as parents or other adults over the age of 21, who will take on joint liability for any card debts that are incurred. If young adults want to apply independently, they will have to show evidence that they can repay the credit card charges on their own. "The credit card company will need some kind of proof of income or employment from the student," Lazarus says. In addition, an under-21 cardholder who has a co-signer won't be able to authorize credit limit increases on the account without the co-signer's permission.
No more freebies. Currently, some credit card companies offer students token gifts, pizza or free meals just for applying. But the Credit CARD Act will outlaw this practice at application sites on or near college campuses. "You won't be able to get a free T-shirt or a free Frisbee anymore for submitting an application," says Diane Nissen Friedman, a financial expert in Ridgewood, N.J. "Because there are not going to be those incentives out there, there's not going to be so much of a motivating factor to get a credit card."
Fewer prescreened offers. Under the new law, credit reporting agencies, such as Experian, Equifax and TransUnion, cannot provide the credit reports of under-21 consumers to credit card companies unless the consumer specifically requests that they do so. This will keep young people from receiving those preapproved offers for student credit cards in the mail.
More transparency about college affinity card programs. Starting in February, colleges and universities, as well as alumni organizations, will have to annually disclose the terms of any marketing or promotional agreements they make with credit card companies. Schools often receive payments or a percentage of proceeds from credit cards issued as part of so-called affinity card programs, which offer alumni and students credit cards emblazoned with the school logo or mascot. The disclosures must clearly state how much money the school has made from the cards that year. Credit card issuers also must file annual reports with the Federal Reserve Board detailing all marketing, promotional or business agreements with colleges and universities, alumni associations and school-related foundations. Since these agreements will be periodically reviewed by the Comptroller General of the United States, it could cut down on agreements that contain questionable terms, and it may motivate students to do a little more research before applying for a school card, Lazarus says. "It gives you a little more knowledge and creates a few more roadblocks between card companies and younger people," he adds.
Recommendations to colleges and universities. The law also urges colleges and universities to adopt policies that restrict credit card marketing on their campuses, including requiring advance notice of when they will be on campus and limiting the locations of marketing activities. The law also encourages the colleges to require credit and debt management sessions as a routine part of new student orientation programs. Recognizing the potential for abuse of students, many schools have adopted such policies over the past several years.
The Federal Reserve on Sept. 29 issued final guidelines clarifying some aspects of the new college credit card provisions. Among the questions answered: "Near" campus -- where card marketing is restricted -- means within 1,000 feet.
Lazarus says the new law may slow the flow of credit to young consumers.
"If a young person is going to sign up for a credit card, they can't do it in five minutes on their way to class," Lazarus says. "They'll have to gather documents and talk to their parents. It might spur a conversation as to what goes into debt and how to manage money."
It may also prevent students from falling into the same trap as Tom Meitner, who got his first credit card during his sophomore year at the University of Wisconsin-Milwaukee. Meitner says he ran up a balance of about $8,000 on two credit cards to buy groceries, plane tickets, nights out with friends and other items. Several years later, he's still trying to pay off his debt.
"I've been tempted many times to spend on them, but I'm not using my cards anymore," Meitner says.
Still, Meitner thinks the new credit card safeguards for students are misguided.
"It all comes down to education," Meitner says. "Parents need to sit down with their kids and explain why and how credit card debt happens. I don't think the government needs to be regulating it so much. My parents believed in letting their kids make their own mistakes, which I wholeheartedly agree with.
"But they should have smacked me when I started using my card."
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