Published February 24, 2010
College students and
their parents may be relieved that Credit Card
Accountability Responsibility and Disclosure (CARD) Act has finally
gone live this week. After all, many of the law’s provisions are
designed to protect college kids from issuers’ aggressive marketing and
high-interest cards.
But
Mom, Dad and their college-age offspring would be wrong to think that
CARD will keep credit-card issuers at a safe distance, says
Christine Lindstrom, the higher education program director at the U.S.
Public Interest Research Group, a consumer-advocate group. Yes, issuers
are barred from luring students with a free slice of pizza or T-shirt
to sign up for a credit card — but they can give out the freebies if
they don’t require students to sign up for the card in return. And
credit-card companies
are already looking for other ways to reach college students, including
appealing to parents (who may need to co-sign for the cards, and
thereby become responsible for unpaid balances).
The market is a lucrative one. According to a 2009
study by Sallie Mae, an originator of student college loans, 84% of
undergraduates have at least one credit card, up from 76% in 2004.
Eight-two percent of college students carry balances – average mean
balances stand at a record $3,173 – and incur finance charges each
month. And seniors graduate with more than $4,100 in credit-card debt on
average, up from around $2,900 in 2004.
“Credit-card issuers
are still going to make credit available to college students because
they are some of the best candidates for credit,” says Ruth Susswein, a
deputy director at Consumer Action, a consumer advocate organization.
College students generate profits for credit-card companies by not
paying their balances in full. And in the long term, they tend to hold
on to their first credit card for life, she says.
Here’s what college students can expect in terms of
marketing and underwriting standards.
Freebies
still being given out
The
CARD Act prohibits credit-card issuers from giving out free stuff to
students in exchange for filling out a credit-card application on
college campuses, at college-sponsored events, or within 1,000 feet of
them.
But it leaves a huge loophole:
Card issuers can still give out freebies as long as they don’t require
students to sign up for a credit card. That means that credit-card
companies can still hawk free stuff on campus for promotion, says
Susswein.
At least two major issuers –
Citigroup (C: 4.26, +0.08, +1.91%) and Bank
of America (BAC: 18.13, +0.09,
+0.49%) – say they won’t. “As a matter of policy, Citi has not
marketed student credit card products to young adults on or near college
campuses in over two years," says Citi spokesman Samuel Wang. And Bank
of America spokeswoman Betty Riess says the bank is “not conducting
campus tabling events to market credit cards to students.”
Marketing to students’ parents
Credit-card issuers are also tapping into students’
parents. Discover (DFS: 15.58, +0.24, +1.56%)
is mailing credit-card marketing materials to parents’ homes, says
spokesman Matthew Towson. “We currently acquire most student accounts
through direct mail and the Internet,” he says. “We do not expect to
change our approach in light of the legislative changes.”
And Wells Fargo (WFC: 31.51, +0.14, +0.44%)
is considering marketing its college-student credit cards through
parents who are existing customers. “We may be looking at that now and
do that in the future,” says Dinna Martinez, a product manager of
student credit cards at Wells Fargo.
Using
financial literacy as a promotional tool
The CARD Act recommends that colleges provide
education about credit cards and debt during student orientation. But
credit-card companies may also use financial literacy to promote their
cards.
For example, when a college
student signs up for their first credit card with Wells Fargo, they can
take an online quiz on credit management and in turn receive a reward,
which is currently a free Fandango movie ticket. “We’ve been doing this
for about six to seven years and we’ve always had an incentive,” says
Martinez. (The bank changes the reward based on customer response.)
Verifying your (or a cosigner’s) income
To get approved for a credit card, students under
21 will need to show proof that they can repay their debt or they’ll
need a cosigner (who is at least age 21).
If
a student goes at it alone, he would have to provide the credit-card
issuer with information about his wages (like pay stubs), brokerage
statements showing interest income from investments, or bank account
statements showing savings, says Lindstrom.
Exact terms will vary by company. Discover’s Towson
says that full-time students under age 21 will need to show verifiable
income that’s above $2,000 a year and must have “an acceptable debt to
income ratio” to qualify for the Discover Student card. When students
use a cosigner who isn’t a full-time student, the cosigner will need to
earn at least $15,000 a year to be considered for a Discover card.
Not all issuers may accept cosigners
As of now, American Express (AXP: 42.67, +0.97, +2.32%)
doesn’t have plans to offer a cosigning option, says spokeswoman
Desiree Fish. However, students under 21 but over 18 who can’t get an
American Express card on their own can have an existing AmEx user add
them to their account.
Cosigning on Capital
One (COF: 43.15, +1.58,
+3.80%) cards, meanwhile, remains in question. Spokeswoman Pam
Girardo says the bank historically hasn’t used cosigners extensively but
that it’s exploring its options. “[We] continue to look for consumers
who have the means to independently pay,” she says.
