This is a guest post by Joshua Heckathorn, who runs Creditnet.com and holds an MBA and B.S. in Finance. Creditnet is a free resource for anyone who wants to learn more about credit and compare hundreds of credit cards online. When Josh isn’t glued to the screen of his Mac, you’re bound to find him at the nearest rock-climbing wall or sushi joint around Seattle.
The new rules of credit have once again ignited controversy around when one is considered a legal adult in the United States. Is it 18 or 21? We just can’t seem to make up our mind.
Yes, you can buy cigarettes and even choose to defend your country at age 18, but according to the new rules, you’re not mature enough to decide whether you can handle the responsibilities of credit. Does that seem fair? Perhaps not, but supporters of the legislation argue that young adults, whether they like it or not, need greater protection to help them avoid falling into massive amounts of debt prior to graduation.
According to SallieMae, the average college senior with at least one credit card graduated with $4,138 in credit card debt in 2008. That’s more than a 40% increase since their previous study was completed in 2004, and 2009 will likely be worse as tuition expenses soar and other lending sources remain in a deep freeze.
The rise in student credit card debt is clearly a problem, but many people aren’t convinced the new rules of credit will actually solve the underlying issue – a lack of financial education among young adults. That’s a tough issue to solve, and in my opinion it must first be tackled by those responsible for raising our nation’s youth – parents and legal guardians. But that’s an entirely different article. For the time being, we’ll just have to make due with what our elected officials have given us.
So, let’s quickly review what you need to know about this new law. Signed on May 22nd, the Credit Card Act of 2009 essentially bans credit cards for people under 21 unless they have adult cosigners or can prove they have sufficient income to support the level of credit given. No one really knows what “sufficient” income means yet, but you can expect to hear more details on this before the law takes full effect in February 2010. The bottom line is if you don’t have a credit card by next February, you’ll have to either beg for mom or dad’s signature or prove you have a job that provides enough income to support a revolving credit line.
In addition, you won’t have to sift through dozens of prescreened credit card offers in your mailbox anymore. Credit issuers are banned from sending them to anyone under 21. And there’s no need to worry about getting an unexpected credit card in the mail after signing up for a free pizza during student orientation. Giving away any type of “freebie” for credit card applications at a college-sponsored event is also banned.
While the Credit Card Act has certainly brought about some much needed changes to protect young consumers from predatory-lending practices, it’s difficult to comprehend how restricting credit for those under 21 will address the underlying issue of financial education. Parents who already foot students’ tuition and credit card bills will likely just cosign for new credit cards and continue paying the bills. Will any of these students learn more about how to manage credit wisely? Very few.
On the other hand, responsible students who are working hard to put themselves through school without parental support might discover they have no access to credit when they need it most. Of course, no credit means no credit score, which will make their lives even more difficult as they enter the real world and need to rely on their credit score to finance a car, home, or even a graduate education.
What do you think of the Credit Card Act? Do you believe the age restriction on credit will have positive long-term effects?
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I think it’s up to the individual person to be responsible enough to take care of their own finances. Don’t blame it on “financial education” for kids. People know damn well if they have money in the bank when they’re buying something in credit.
And for those who can’t control themselves, they’ll suffer the consequences, but don’t restrict otherwise capable adults from building credit while young. This America holding people’s hands crap has to end.
I agree, the handholding is ridiculous. There’s absolutely no reason why young adults should be restricted from taking the initiative to build their credit.
Also, while it’s true that people may know how much money they have in the bank, I’m constantly amazed at how little young adults understand about credit cards. 99% of the time it’s because their parents never exposed them to credit at a younger age or taught them any personal financial skills whatsoever.
It’s sad, but many individuals, no matter how smart they are, need someone else to help them learn how to take care of financial matters. Those who receive that help when they are young, are generally in much better financial shape by their early twenties.
However, if you’re only going to use your credit card in foreign countries occasionally, then your biggest concern should be to avoid the typical 3% foreign exchange fee when using your credit card outside the U.S.
Simple really young people are the ones most likely to not read the terms and conditions for the card and are the most likely to run up high balances and incur late fees, over the limit fees and paying the maximum amount of interest. It also starts a long time association with depending on credit cards to live.
I can’t believe I’m so far out of the loop. I wasn’t even aware that this existed. Thanks for outlining it for us!
You’re welcome…glad you enjoyed the article.
Keep a close eye on what happens over the next 6 months as the credit issuers try to figure out how they will work within the new rules. We’re likely to see more changes that may directly affect your ability to secure new credit.
Finally, someone is looking at it from the student’s perspective! Please see my post on CardRatings.com. The issue is that by making it harder for banks to issue credit cards to people under 21, it will become too much of a hassle and they won’t bother to do it except in limited circumstances. Another problem that I have with the concept is this… If a 19-year-old truck driver applies for a card, he has a steady source of income. If another 19-year-old has chosen to go to college, better himself AND potentially earn MUCH more over the course of his lifetime, he can’t have a credit card. Makes that whole Obama stay-in-school message pretty ironic doesn’t it?
I agree Kate…the new rules are discriminatory, whichever way you choose to look at them.
HSBC has a student credit card. Usually the limit is around $500. They take into account that you might not have much of an established credit history. 1-800-975-4722 That’s their number. They are pretty good cards too. Mastercard. Accepted anywhere mastercard is accepted, worldwide too.
In general, the best way to use a credit card is to funnel your normal spending through it for the rewards and then pay it off in full each month. If that was your plan, then I’d suggest whichever student rewards credit card will pay you the most for your normal spending profile.
I like to call it your credit “GPA”. Get some credit (preferably no annual fee), Pay in Full, and Always live within your means.
The credit card company won’t know you’re planning to leave the country! Even if they did know, they can’t stop you, unless they first sue you and get a court order saying you can’t leave.
everyone has to take their own responsibility.
One of the few credit cards still charging 0% for foreign transactions is Capital One. Other cards may offer 0% for their “premier” members; in other words, pay a high annual fee and you’ll save the 3% normally charged on transactions made outside the US. But Capital One still waives this fee for their cardholders, even students. Feel free to visit our credit cards section at Creditnet.com to read reviews and details of student cards, such as those offered by Capital One.
These credit-card measures look good on first blush. I am wondering what kind of pressure this will create for “talented” bank executives. And how the large banks will attempt to pass higher fees on traditional checking and savings accounts, or otherwise, weasel into a new predatory practice, under care and lazy eyes of the FDIC and Treasure Department.
It’s probably good that this is finally happening; like any of today’s youth needs any more debt.
You obviously put a lot of work into that post and it’s very interesting to see the thought process that you went through to come up with those conclusion. Really interesting and informative article, keep posting. Nice work, thanks for such information.
Those balances sometimes grew to several thousand dollars, but I was able to pay them down during the summer or shortly after graduation. On the other hand, ten years later, I still owe tens of thousands of dollars in student loans.
When it comes to credit cards, many consumers have been getting shafted. All of the major banks providing credit cards have gotten away with reaping profits.
Oh, the Swiss are taking a stand. There’s a first time for everything. Actually, it sounds more like they are shriveling up and going into hiding.
There are plenty of low-cost, public and private colleges offering online courses that you may find more satisfying than the for-profit you’re attending. You might want to look into the offerings at Brigham Young U or Louisiana State U for example if you want to continue to take classes online.
I have always thought that there should be a course on credit management in either high school or college. Slick card companies take advantage of unsuspecting students who are already strapped for cash.
Choose a main topic and then explore subtopics to see an excerpt of the specific section, an explanation of what it is and what people are saying about it.
All of the major banks providing credit cards have gotten away with reaping profits.
Credit CARD Act of 2009 is a federal law passed by the United States Congress and signed by President Barack Obama.
im not paying for it for like 2 years,would the credit card compay would hold me? or would they file legal case against me because of my credit card and wouldnt able to go out of the country?was this happening due to credit card problems?
Can anyone tell me what the best college student credit card is? What’s usually the credit card limit for students? I’m planning to get it just in case I need it when I go to South Korea this summer….
This America holding people’s hands crap has to end.
In basic, the top approach to use a bank card is always to funnel your regular paying through it for the rewards after which shell out it off in total every month. If that was your plan, then I’d recommend whichever student rewards credit card will pay you probably the most for the standard shelling out profile.
In common, the best method to use a bank card is usually to funnel your usual paying by means of it for your rewards after which it pay it off in full each and every month. If that was your program, then I’d suggest whichever student rewards bank card will shell out you the most for your regular wasting profile.
We had a Loews credit card closed out from under us because we didn’t use it enough. The reason given was “low revolving debt to credit ratio” which, in legalese, means they weren’t making enough money off of us to keep us as customers..
I was looking into the Discover Student Card for College Students, but I’m not sure if I need some type of credit first. Can I still get the card despite my lack of credit history?
It is great to know we have this new Credit Card Act which will certainly help those whose debts are ballooning due to interests and other rules that are only in favor of the issuers. This act will regulate the way the issuers will deal with their customers.
It’d be nice if parents would police their children’s online/gaming activities, instead of expecting the Government to do so. This country needs less bureaucracy, not more.
I think there should be less restriction, students, and young people need to learn about credit the hard way, it’s not the government’s job to protect people.
Till then,
Jean
I think once the student turns 18 he is old enough to decide what he wants to do and should not be restricted. The student is considered an adult in most other aspects and should be treated like one in this case too.
The Credit CARD Act also limits the ability of banks to market credit cards on college campuses. Credit card companies who offer gifts, such as a free hat or T-shirt for signing up cannot do so within 1,000 feet of campus…
I can’t believe I’m so far out of the loop
In basic, the top approach to use a bank card is always to funnel your regular paying through it for the rewards after which shell out it off in total every month.
@auto phi, When you are young, you have lot of passion and carelessness. You take several risks in life. So, that might not be the best time to care about finances.
We should really report these parents to child services. If this is a problem for them, then their children must be suffering from a significant amount of neglect.
@fathersdaygift…
Lol…your idea is somehow funny to me, but I hope people could have do that.
@fathersdaygift…
Cool funny idea mate
I agree Kate…the new rules are discriminatory, whichever way you choose to look at them…
Thanks for information..
I am not sure what to say, but it might help some students and it might not be good for others.
Yes, it perhaps able to help some of them but might not good for others.