Under 21? Want a credit card? It just got a whole lot tougher for you to get one. The Credit CARD (Card, Accountability, Responsibility and Disclosure) Act of 2009 went into effect Feb. 22. Although there are many complex provisions in this law that aim to protect consumers, there are a few in particular to which college students should pay especially close attention. One aspect of this law is intended to prevent young people from accruing large amounts of debt that they will be unable to repay, but by accomplishing this, the law will also make it much more difficult for responsible young people to obtain a credit card to build credit or to finance emergency expenses.
It is certainly true that many college students incur staggering amounts of credit card debt. According to Sallie Mae, a company that provides student loans and college savings plans for students and parents, 84 percent of college students have at least one credit card, with their average balances totaling more than $3,000. The CARD Act attempts to deter this type of behavior by limiting college students' access to credit cards. These new provisions require individuals under 21 to have a cosigner or prove "sufficient income" to get a credit card. "Sufficient income," however, isn't clearly defined by the new law, and it is left up to the credit card companies to decide what this means. The law also prohibits credit card companies from promoting their cards by using free gifts within 1,000 feet of college campuses.
So no more credit card companies luring students with free pizza if they apply for a card. Are all these new regulations for young people helpful? It depends on who you are. If you don't understand credit, would actually sign up for a credit card just to get a free t-shirt, or think a credit card is just "free" money, then these new restrictions may protect you. If, however, you are responsible and want to build credit by paying off your balance each month, these laws will make it more difficult for you to do so.
The arguments for and against these types of regulations essentially boil down to the age-old argument of whether or not the government should prevent you from voluntarily making decisions that it deems to be against your best interest. Sure, some young people may act irresponsibly when it comes to credit cards, but shouldn't it ultimately be the student's responsibility to determine what and how much they can afford to charge? One potential side affect of this law is that it may make it more difficult for young adults to build a good credit history. The length of your credit history is one factor in determining your credit score, along with whether or not you pay your bills on time and how much credit you have available. Your credit score is important because it essentially measures how risky a borrower you are. A person with a good credit score will generally get a better interest rate when financing a house or car than someone with a lower credit score. If students have to wait to get a credit card to start building a credit history, it could have an impact on their abilities to buy cars or houses once they graduate.
Rather than reducing a young person's ability to get a credit card, we should be focusing on educating people about how to use credit responsibly. Parents need to be sure to talk to their children about how to responsibly handle credit. If universities are so concerned about their students racking up record amounts of debt, they should offer more seminars about how to manage debt and credit responsibly. Even if we restrict those under 21 from getting a credit card, without good information, these individuals may encounter the very same problems that this law is trying to eliminate once they turn 21.
Although the Credit CARD Act of 2009 might prevent young people from racking up huge amounts of debts that will take them years to pay off, it also may unintentionally make it harder for responsible young people to establish good credit. Ultimately it is the responsibility of the person taking out the credit card to determine how much they should charge and whether or not they can afford it. Rather than making it more difficult for responsible individuals to obtain credit, the focus should be on educating individuals so that they can make good, informed decisions about credit cards.
Megan Stiles' column appears on Wednesdays. She can be reached at m.stiles@cavalierdaily.com.
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