The Credit CARD Act is now in effect and one of the major provisions is a restriction on credit cards to those under 21. What's a student to do? Here are some ideas.
The Credit CARD Act that took effect on February 22nd had as one of its major provisions restriction on marketing credit cards to young adults under 21.
“Right now, it is easier for a college student to get a credit card than to get up for class. College students use credit cards to pay for everything, just like their parents. Once this new law takes effect, many college students will have difficulty getting a credit card,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.
Beginning February 22, issuers are not able to offer free merchandise to lure students to sign up for a credit card on college campuses, at college sponsored events (like sporting events) or within 1,000 feet of the campus. In addition, the CARD Act bans credit cards to people under 21 unless there is an adult co-signer or the young adult can show proof they have the income to pay the debt.
“The regulations leave ‘sufficient income’ open to interpretation. Some issuers will just want to know that your monthly income is more than your minimum payment due. However, students need to assess their own situation. If you are struggling to pay for your own food, housing, transportation and education bills, you can’t afford to carry a balance on a credit card,” says Hardekopf.
Credit lines will also start out low. If there is no co-signer, credit lines will be $500 or 20 percent of the student’s annual income. If the student has more than one card, the credit line from all credit cards will be up to 30 percent of the annual income.
College is a good time for students to learn how to correctly use credit cards and build up their credit score. However, many students are unprepared for the responsibility.
A 2009 Sallie Mae study showed that college students used credit cards more than ever before. 84% of college students have at least one credit card, up from 76% in 2004. The average amount of debt carried by college cardholders is $3,173 which represents a 46% increase over the 2004 figure of $2,169. The average student has 4.6 credit cards.
Only 17% of college students pay off their entire balance each month and 1% had parents or other family members paying the whole balance. The remaining 82% carried balances and paid finance charges each month.
Parents must educate their students about using a credit card. One-third of students rarely or never discussed credit card use with parents, and nearly all undergraduates would like more information on financial management topics.
“Parents can make the co-signing for a credit card a very teachable moment. Tell your student how to deal with credit cards and the pitfalls that exist. Explain how to read the monthly bill and how important it is to pay the balance in full at the end of each month. Give them real-life examples of the credit card mistakes you have made so they can avoid making the same mistakes,” says Hardekopf.
Options for Credit for College Students
The student can apply for a card with an adult co-signer. If the student is unable to pay off the account, the credit card issuer will demand that you pay off that debt in full.
The loan will be reported on the student’s credit report. If it is paid on time and more than the minimum, it will help increase credit scores. However, adding your name to someone else’s debt is a very serious financial step because this mixes your credit record to your child’s. If either the student or parent defaults, mistakes become community property and everyone suffers because the co-signer has committed to make good on this account. Delinquencies will show up on both credit reports. The only way to get your name off of the loan is to pay off the loan.
As a cosigner, your liability for the loan may keep you from getting other credit because creditors will consider the cosigned loan as one of your obligations.
2. Authorized user
This is almost like an apprenticeship to teach your student how to use a credit card. You give your student authorized permission to use your credit card by adding him/her to the account. The student can receive and use a card with his/her name on it without being legally responsible for repaying the credit card balance.
The account is considered the same for credit scoring as if it were owned by the authorized user. If you have a good credit score, your student will benefit from that. However, if you have a couple of late payments or get into trouble, this will also affect the authorized user. Authorized users can be removed with a letter or phone call to your issuer.
3. Open a Checking Account with a Debit Card
A checking account with a debit card is a good first step toward learning how to manage credit. While debit cards have their own fees and downfalls, college students can get into far less trouble paying a $30 overdraft fee than running up a significant credit card balance and it does not pull down your credit score.
4. Prepaid cards
Opening a prepaid card may be the easiest option for students, but their fees are higher. Make sure the card reports payment activity to credit bureaus (many secured and prepaid cards do not). AccountNow prepaid Visa reports to all three agencies. The processing fee is $19.95, the monthly fee is $4.95 and there is a $0.50 transaction fee per transaction.
“Prohibiting promotional offers and marketing on campus will be help reduce impulse applications. If your student is qualified to apply for a credit card, help them research credit card offers to find the best card with the lowest rate. Use the Terms and Conditions to compare cards and to explain the fine print,” says Hardekopf.