Student credit cards or cards issued to minors has been a concern of many for some time; often college students will apply for and be granted multiple credit cards, charge them to their limits and think they will be able to pay them off when they graduate, which doesn't always happen.
Recently, the Federal Reserve enforced a few changes in credit card laws regarding minors that should help young consumers keep better control of their debt. In the past banks would blanket campuses with flyers offering free gifts and such for applying; this is no longer allowed.
New Federal Reserve consumer protection credit card laws for those under the age of 21 include:
- From now on, all credit card applicants under the age of 21 must prove the ability to repay. In the past, some student credit card companies were only concerned about the student being able to pay the minimum payment while in college, assuming they would pay off the balance after they graduate, regardless of their in-college income.
This practice required the card holder to pay a large amount in interest, since the minimum payment would rarely lower the balance considerably. Worst case scenario: the college student could not afford the minimum payment or went over their limit and incurred fees they could not afford to pay, so the accounts go into default. They graduate college and are welcomed into the adult workforce by a handful of debt collectors. To add to their problems, in some cases bad credit can decrease their chances of obtaining the job that they need to pay off their debt. Hopefully, this new law will help students avoid this financial pitfall.
- Secondly, if applicant under the age of 21 cannot prove the ability to repay, they must have a cosigner. The cosigner must prove the ability to repay and be over the age of 21 and to protect the cosigner, balance increases or other significant changes cannot be imposed without consent of the cosigner. This change does not necessarily offer consumer protection to the student, if they default, it will look bad on their credit, but the credit card company will contact the cosigner for payments once the student stops paying. So, in some ways this change protects the credit card companies' investment more than the student.
These rule changes are only for new card holder, not those under age 21 who obtained their card before February 22, 2010. A few other things to consider if you are an applicant under 21 concerns the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 signed by United States President Barack Obama.
This act requires that not only minors prove income but that their credit limit also be imposed based on their ability to repay. Additionally, a credit applicant under the age of 21 may be required to pass a course in financial management before being granted an account.
The new Federal Reserve Laws and the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 were created to attempt to produce college graduates with less debt. Entering the job market is stressful enough after graduating with thousands of dollars in student loans, but graduating with manageable credit card debt might make it a bit easier.