Credit Card Rules for Young Adults
Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension, oneill@aesop.rutgers.edu
There was a time, up until February 22, 2010, when college students and other young adults under age 21 were “easy targets” for credit card offers. In exchange for inexpensive freebies, such as T-shirts, pizza, hats, and highlighters, young adults were actively (and often aggressively!) sought after to sign up for credit cards. “Plastic for pizza” (or some other incentive) was widely practiced. Not anymore.
As a result of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (a.k.a., the CARD Act or Public Law 111-24), there are strict rules on the marketing and issuing of credit cards to young adults. The CARD Act doesn’t prohibit college students from receiving credit cards but it does help protect them from practices that, in the past, led many to take on multiple lines of credit and incur large amounts of debt that they could not afford to repay.
Below is a list of CARD Act provisions that affect young adults with descriptions of how they impact college students and others whose age falls within the age cohort of traditional college-aged students (i.e., age 17 through 20). Also included is a list of credit card alternatives for young adults who are unable to get a co-signer or document that they have available resources to afford credit card payments.
Marketing Credit Cards to Young Adults
• Credit card companies are prohibited from offering free merchandise to college students in exchange for applying for a credit card. This rule is in effect on or near a college campus and at college-sponsored activities such as concerts, homecoming rallies, and athletic events.
• Credit card issuers and universities must disclose agreements (a.k.a., “affinity arrangements”) with respect to the marketing of credit cards to students and corresponding financial compensation practices.
• Prescreened credit card offers to young adults are limited through the use of birth dates in credit reports.
Credit Card Use by Young Adults
• Credit card issuers are prohibited from issuing credit cards to people under age 21 unless applicants have a co-signer or can prove that they can afford to make payments (i.e., have a verifiable annual gross income). The co-signer can be a parent, legal guardian, spouse, or any other individual age 21 or older having the means to repay a young credit card applicant’s debts.
• Young adults are limited in the amount of credit they can receive. Even if a young adult does qualify to receive a credit card by having a means to repay debts, the amount of credit that can be extended is capped. The maximum amount that a young adult, for whom no one else assumes joint liability, can charge on one credit card is limited to the greater of $500 or 20% of the student’s annual gross income in the most recently completed calendar year. In addition, the aggregate limit for all credit cards held by a young adult is 30% of the student’s annual gross income in the most recently completed calendar year.
Alternatives to Credit Cards
• Young adults can be added as “authorized users” to their parent’s credit card(s) and make arrangements to reimburse their parents for charged expenses. A young adult’s credit history will be reported to credit bureaus in his or her name. Unlike co-signing, parents are able to see a child’s credit card purchases as they occur (i.e., during the next billing statement) rather than hear about payment problems several months later when interest and fees would have already accrued. Either way (i.e., co-signing or authorized user status), parents will need to make payments, if their child doesn’t, to avoid damage to their own credit score. Conversely, if a young adult is an authorized user and the parents make late payments or have a high balance, everyone’s credit score (i.e., the young adult’s and the parents’) will be negatively affected.
• Young adults may be able to use secured credit cards as a way to prove that they have resources to pay their debts. However, they will still have to show that they have sufficient income or assets to pay monthly charges even with a secured credit card deposit. Secured credit cards are backed by money that cardholders deposit with the credit card issuer as security (collateral) for the credit card limit. Secured credit card limits are usually 50% to 100% of the amount deposited (e.g., a $500 to $1,000 credit line with a $1,000 security deposit). An advantage of secured credit cards is that you can’t charge more than the allowed amount based on the security deposit. A disadvantage is than many secured credit cards charge higher interest and fees than unsecured cards.
• Young adults can use prepaid debit cards. They work like debit cards issued by banks or credit unions except that they are not linked to a checking account. Instead, like prepaid phone cards and gift cards, they are widely available at discount stores (e.g., Wal-Mart) and drug stores and can be loaded (and reloaded) in various denominations (e.g., $25, $100, and $500). Unfortunately, prepaid debit cards have three big disadvantages. The first is that they are not considered a form of credit and, therefore, don’t help users establish a credit history. The second is that many have multiple layers of fees that erode the value of the amount loaded onto the card. Examples include activation (a.k.a., enrollment) fees, bank teller fees, ATM withdrawal fees, balance inquiry fees, monthly maintenance fees, and inactive account fees (e.g., if the card is not used after 60 days). The third disadvantage of prepaid debit cards is that there is less protection than credit cards in cases of loss or theft. If a loss is reported more than 60 days after it occurs, users can lose their entire prepaid debit card balance versus a maximum $50 loss with lost credit cards.
It should be noted that the CARD Act contains many additional provisions that positively affect young adults. For example, two-cycle average daily balance calculations and the practice of universal default are prohibited and over-the-limit fees are limited. See the fact sheet Major Provisions of the 2009 CARD Act for additional information about legislated changes in credit card practices. Another interesting facet of the CARD Act, with respect to young adults, is the “Sense of Congress” section (i.e., a recommendation without the power of law) that recommends “that credit card and debt education and counseling sessions be offered as a regular part of any orientation program for new students of such institution” [i.e., institutions of higher education]. Some institutions have already been doing this (e.g., Texas law requires state colleges to provide a credit education classes for new students) but it is expected that more will do so in the future.
Opinions about the CARD Act’s impact on young adults are mixed. Supporters praise the law’s objective of preventing crushing debt in students’ lives and provisions that protect young adults from aggressive credit card marketing practices. Critics have questioned why young adults are restricted in their use of credit cards but are allowed to vote or serve in the military. Additionally, questions have been raised about whether the CARD Act will slow the development of financial independence by young adults and restrict (or, at least delay) their ability to build a positive credit history. Lack of a credit history could hinder students trying to borrow money for graduate school or get a loan to buy a new car or start a business following graduation. Even future insurance premiums could be affected because no credit means no credit score, a key factor in setting auto insurance rates.
No matter how young adults feel about the CARD Act, “it is what it is.” The bottom line is that credit cards are now more difficult to obtain than they were in the past and the amount that can be charged is limited. Time will tell if age restrictions on credit cards have positive long-term effects.