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Era of readily available credit cards for young adults ends

Students, once coveted by issuers, now have fewer choices

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In a few days, the era of readily available credit for people under 21 will end, not with a bang but a shrug.

Era of readily available credit cards for young adults ends
CREDIT CARD REFORM ARRIVES

Beginning Feb. 22, issuers will be prohibited from issuing credit cards to anyone under 21 unless the applicant can produce either proof of sufficient independent income to pay off the loan or a willing co-signer who is over 21.

The new restriction is part of sweeping consumer reforms contained in the Credit CARD Act of 2009, which also reins in on-campus credit card marketing and requires that the terms of college affinity card agreements between colleges and credit card issuers be reported to the Federal Reserve and disclosed to the public.

No last minute rush
The move to restrict credit to those under 21 has met with mixed reactions from college students. Based on an informal survey of campus newsrooms across the country, there has been neither a rush on campus to apply for independent credit cards to beat the deadline nor protests against the new regulations.

"We did a story on it last week, but my sense was most students weren't aware or didn't care," says Matt Sebastian, editor of the University of Colorado Daily.

Two major issuers, Bank of America (which acquired MBNA'scollege affinity card programs) and Chase, declined to comment on whether under-21 card applications had increased in recent weeks.

But for card issuers, and the alumni associations that depend heavily on $1 million-plus annual royalties from college affinity card contracts, the restrictions amount to the nail in the coffin of what had been a lucrative win-win marketing program. (See Once secret college card-marketing deals to be revealed.)

College card market 'absolutely decimated'
"The university market, which is not the largest segment but an important growing segment, has been decimated, absolutely decimated," says card industry consultant Robert Hammer.

"If I have to sign for my college-age daughter, that's an extra step, which means that (issuer) response rates are going to be way down and their approval rates will probably be way up because those who do that have full support of a bill-paying parent. So your cost per acquired account is going to go through the roof. And if your cost per acquired account goes through the roof, what will you do with that marketing? If not shut it down, you're going to curtail it dramatically, absolutely no doubt whatsoever. By how much? We'll have to see."

Consumer groups successfully dragged college affinity cards into the under-21 marketing controversy as yet another example of deceptive practices by card issuers that directly or tangentially target young people. Many of the on-campus promotions soon to be banned by the Credit CARD Act were made possible by contracts between the card issuer and school alumni associations, which act as third parties in the affinity agreements. Card issuers have long coveted the prized first-card status, which has been shown to form lasting bonds with consumers.

The university market, which is not the largest segment but an important growing segment, has been decimated, absolutely decimated.

-- Robert Hammer    
Credit card industry consultant    

Alumni associations counter that the overwhelming majority of their affinity card customers are adult alumni, though most programs do not prohibit students from obtaining a card.

Despite confidentiality clauses in their affinity card agreements, some schools have either ended their programs or disclosed the terms under mounting public pressure to do so.

Now that marketing to those under 21 has been drastically restricted, what is the prognosis for those lucrative multiyear, multimillion-dollar affinity card contracts?

"You can bet this: They are certainly not going to be paying as much money for those programs as they have in the past," Hammer predicts.

Spreading chill on student card marketing
Brian Flahaven, director of government relations for the Council for Advancement and Support of Education (CASE) that works on behalf of alumni associations, says the chill is already being felt by his members.

... [C]ard companies haven't been as interested in doing these programs and may not be in the future.

-- Brian Flahaven
Council for Advancement and Support of Education

"The trend among alumni associations is that the card companies haven't been as interested in doing these programs and may not be in the future," he says. "Talking to alumni association folks, even the programs that are around are not generating the support and the resources that they once did to help the alumni association fund their operations. They are having less of an impact."

In its 2007 Survey of Alumni Association Directors about their affinity programs, CASE found that 81 percent of associations with affinity programs offered credit cards. Alumni associations, which receive 20 percent and more of their annual revenues from affinity programs, like the financial benefits but expressed concern over the lack of control over the issuer's activities, alumni complaints of unsolicited junk mail, and the potential impact on the association's image.

Have affinity credit card programs now become toxic to colleges and universities?

"I don't know if that's the case," Flahaven says. "I think there is a strong belief in affinity programs, which go beyond cards to everything from auto insurance to travel programs. It's a way for the alumni association to provide services to alumni to keep them connected to the institution."

'It's not worth it'
"The bigger question is, how much of an effect will the law have on the overall affinity credit card programs? More than likely, it will be the credit card companies that will say it's not worth it. Most institutions are probably looking at it and saying that the marketing to students piece is something they're not going to do in the future."

Certainly the playing field will be drastically changed now that affinity card contracts must be made public. Then again, Peter Garuccio of the American Bankers Association says that might be a blessing in disguise for some issuers.

"If you are a credit card company and you can see the contract that one of your competitors has with a university, it's free for you to peruse, that gives you an opportunity to come in there and maybe compete for that business. So maybe it cuts two ways," he says.

Parental control: Unintended consequence?
Then again, perhaps the act will have the intended effect of helping college students and their parents avoid runaway indebtedness by keeping an umbilical cord on the credit card.

American Express spokeswoman Desiree Fish thinks so. Although AmEx long ago stopped marketing to students, a program that it launched a year ago at the request of its card members gives parents the ability to easily adjust spending limits on supplemental cards for their kids.

"That has been extremely popular ever since we launched," Fish says. "People love that ability to set limits. They like those controls."

Garuccio predicts that new products will likely emerge from the ashes of the old college affinity card programs.

"The new rules are sweeping in their breadth and depth; it's a re-jiggering of the entire business model. You're going to see companies experimenting with new products or product enhancement," he says. "The key is, consumers are really now in the driver's seat. They're going to drive what ultimately surfaces as the products of choice out there."

See related: Once secret college card-marketing deals to be revealed

Published: February 17, 2010


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