Parents expect their children to return home from their first
year of college with a better grasp of the world and a perhaps a few
new friends. Some, however, are arriving home with an unexpected
burden—credit card debt. Card issuers have long bombarded college
students with solicitations via mail and enticed them to sign up for
cards on campus by promising free food or other items in return for
their signatures. The ease with which students could acquire cards has
astounded some. "Students without income, assets, jobs, or credit
reports have been issued credit cards virtually automatically," says Tim
Mensing, student body president at the University of Washington. "Just
being a student was good enough for them to issue a card."
That's no longer the case. The CARD Act of 2009—signed into law last
May, with many provisions going into effect today—will offer protections
for college-age consumers who are coveted by card issuers. Anyone under
21 must either have a cosigner or be able to prove a means of
repayment—steady income, assets, or a sturdy credit rating—in order to
obtain a card. While card issuers are still allowed to solicit students
on campus, they can no longer do so without informing regulators. The
days of hungry students signing up for a credit card in exchange for
free pizza are gone as well, as issuers are forbidden from offering
giveaways or freebies to lure students into card agreements. And
universities, which often enter into paid agreements that provide card
issuers with students' contact information and allow them to market
their cards on campus, must make those agreements public. "The
disclosure rule came as a surprise to a lot of schools," says Peter
Osborne, a consultant who has advised alumni associations on the matter.
"There are many schools out there that have a great story to tell from
the revenue that they've generated from these contracts and from
advocating responsible behavior by the issuers."
The Federal Deposit Insurance Corp., which is tasked with monitoring
card issuers to ensure their compliance with the new rules, is confident
that the changes will lessen younger consumers' exposure to credit card
debt and may ease many parents' worries. "[Credit card debt] puts the
students at a disadvantage as they begin their working life," says Alice
E. Beshara, chief of the FDIC's Chief Compliance Examination Section.
"So, it's hopeful that this will prevent that from happening."
A decade ago, more than half of college students carried a credit
card in their own name. The burgeoning popularity of debit cards has
caused credit card use to slide, though a healthy portion of students
still opt to carry one. According to a 2009 study done by the research
group Student Monitor, 37 percent of college students at four-year
institutions carry a credit card in their name. Of those, 47 percent
acquired their card while in school, and 40 percent carried a balance
month-to-month—and average of $495—rather than paying the bill in full.
While less than half of college students carry credit cards, many are
eager to see more stringent regulations put on issuers. A 2008 survey
of more than 1,500 college students across the country performed by the
U.S. Public Interest Research Groups, which lobbied heavily for the CARD
Act, suggests that students are receptive to the new rules. Roughly 80
percent of the respondents indicated that they wanted to see some sort
of controls placed on credit card marketing at their schools. Two thirds
of the students opposed their schools sharing their contact information
with card issuers as part of paid agreements. While the CARD Act has
not outlawed these agreements, it has increased their transparency.
According to the survey, only 36 percent of students oppose the now
banned free giveaways, hinting at their appeal. "It's essentially a
seduction. The free gift gets you to the table—you say, 'All I have to
do is fill out this application and you're giving me food?' " says Ed
Mierzwinski, director or PIRG's Consumer Program. "It's a really cheap
marketing gimmick to get people to sign up for cards they're not ready
for." While giveaways are now banned, the impact will likely be
negligible. According to the Student Monitor study, only 2 percent of
students with credit cards indicated that they acquired a card in
exchange for a gift.
Card issuers say they plan to comply fully with the new law.
Citigroup and Bank of America, the nation's two largest card issuers,
both indicated in written statements to U.S. News that they are
in full compliance with the new rules. Neither would comment
specifically on how their marketing efforts on campuses and to consumers
under the age of 21 might change. Peter Garuccio, a spokesman for the
American Bankers Association, a banking lobby group, says, "It's pretty
clear that it will be tougher for people in this group to get credit
cards. I think that you'll probably see a decline in the number of cards
in this segment."
Though the PIRG study indicates that students are receptive to credit
card reform, there are potential drawbacks. Credit cards are the
simplest way for students to build strong credit before they're thrust
into the real world. After college, a healthy credit score, typically
over 700, can make it far simpler to obtain an apartment or financing
for a car. While the new regulations make it easier for students to
avoid debt in the near term, it will make it more difficult for them to
take out a loan in the future. "The unintended effect of the CARD Act is
that students will get limited access or no access to credit," says
Larry Chiang, CEO of Duck9, a firm that offers a service to help
students improve their credit scores. "The near-term effect is that it
effectively shut down the issuance of credit to students."
