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?