One thing might be missing from college campuses across the nation this year: representatives from credit-card companies sitting behind tables and booths eager to sign students up for a credit card.
In an effort to curb the amount of debt students graduate with and stop credit companies from targeting vulnerable students, college students are now being restricted in terms of credit card issuance and use.
Part of the Credit Card Accountability Responsibility and Disclosure, which became law in May 2009, stops predatory lending practices and adds various provisions that protect students and their parents.
Conditions of the Act
Under the conditions of the act, credit-card companies are no longer allowed to go after young adults as fervently as they have in the past. Companies can no longer send pre-approval offers in the mail or promotional goods, such as hats and water bottles to individuals under 25.
“The intent was not to be deluging the young college students with offers,” says Catherine Williams, vice president of financial literacy at Money Management International. “Their job at that point is to learn skills and abilities and to learn how to manage the money rather than spend it.”
Students, or anyone under the age of 21, will either need to prove they have sufficient income to pay off any incurred debt, co-sign a credit contract with a parent or family member, or become an authorized user under a parent’s credit.
Co-signing with a parent means both parties are responsible for payments and any missed bills will be reflected on all credit reports.
“When you co-sign a loan, you are not second in terms of being called and being pressured for payments,” says Williams. “You are equally responsible, so the co-signing account will go on your credit report, the payment activity will go on your credit report and any negative activity goes on your credit report. This is not something you do as a generous gesture to a friend or a family member. The other [risk co-signing] can have is it uses up some of your credit potential.”
The new regulations also keep universities honest about their relationships with credit-card companies.
Universities must disclose marketing agreements with credit-card companies to the Federal Reserve board and companies must share any business that is done and report any payments made to a university or school. Marketing opportunities are to be kept at a minimum and cleared with the university in advance.
The law also encourages universities and schools to provide credit and debt management education to the students.
Benefits of the Act
Although students may not fully appreciate the implications of restricted credit right now, it serves as a preventative measure by keeping risk at bay--especially when you’re looking for a job in the future.
“Many people don’t realize that your prospective employer is likely to pull your credit report during the hiring process,” says Gail Cunningham, spokesperson from the National Foundation for Credit Counseling. “You don’t want to start out with one foot in the hole on your job search; maybe you’re the ideal candidate and they’re debating which applicant to hire. If you have the negative marks on your credit report, it may be the tipping point where they hire the other person.”
When co-signing a loan with a student, parents or family members need to have an agreement with the student about how to use the card--otherwise both parties could end up in financial trouble.
“Statistically, 1 in 4 people who co-signs for a loan, for a credit card, for anything, ends up paying that balance--that’s a serious thing to consider,” cautions Gwen Riase, financial educator and founder of US Wealth School. “If the credit card is in your name as the primary person, it’s really a promise that you’re going to pay back whatever you charge to the bank or to the credit card issuer.”
By having ground rules about a credit card, such as using it for emergencies only, everyone remains on the same page.
Because the law is still so new, it is unclear what will happen to a student on a co-signed account once that student becomes old enough to have their own credit card.
“I wonder how the banks will treat that once your student becomes 21,” says Riase. “I don’t have any evidence that it will be that easy.”
How to choose the right card
Now that you understand the new regulations, it’s important to pick a card that is right for your life situation right now.
“Anyone wants a card with a low interest rate and no annual fee,” says Cunningham. “Of course, those are reserved for people with the best credit reports and scores.”
If a student co-signs with a parent with a good credit history and score, they may be eligible for a card with minimal fees and an optimal interest rate.
“If they are looking at cards, one of the important things is looking at the fees and the interest rate that it’s going to cost them,” says Riase. “Is it a variable or fixed rate? There are fixed rates out there-while it may be a little higher, you’re going to keep a balance on them. The variable rate is usually based on the prime rate and it’s not going to be the same amount each month.”
In researching credit cards, keep in mind there are different rules for different companies. Riase suggests using Bankrate.com, which helps you find a good card for your credit situation.