Posted on November - 29 - 2009
Changes in Young Consumer Credit
Many teenagers and college students believe getting a credit card is a rite of passage into adulthood, but new findings show that young consumers might not be ready for the responsibility that comes with a credit card. A survey from National Jumpstart, a group that measures financial literacy among students, found financial literacy amount high school students had fallen to its lowest levels ever. A recent study from Sallie Mae, one of Americans leading savings and paying providers for college programs, found that 84% of college undergraduates had at least one credit card, up from 76% in 2004. This increase in credit card use has had a correlating rise in credit card debt for young consumers. The study showed that college seniors graduated with credit card debt of around $4100 an increase of over $2000 from 2004. In addition, it was found that just under one fifth of college seniors had balances greater than $7000. Congress recently passed the Credit Card Act 2009 that focuses on these issues. Provisions in the bill address parental co-signer requirements, credit card companies marketing techniques aimed at college students and campuses.
Parents As Co-Signers
Under the new Credit Card Act consumers under 21 years old would not be allowed to apply for a credit card unless their parents or legal guardians acted as co-signers. If the young consumer could show proof of their ability to repay the credit card debt, they would not need to have a cosigner. As a cosigner the parent or guardian take just as much responsibility for the debt as the teen. Any late payment or default would end up on the parent/guardian’s credit history. The cosigner can be sued for any debt that the teen acquires. The teen would also need to get permission from the adult to increase the credit limit on a joint account. The Credit Card Act also bans banks from sending prescreened offers to anyone under 21. Prescreened or prequalified credit card offers are used by banks to target new customers to showcase products. The special offers are usually not given to the general population and typically come through the mail. According to the Sallie Mae study, direct mail prescreen offers were the number one way students received their first credit card. Although the Credit Card Act specifically bans this practice toward those under 21, anyone wanting to “opt out” of receiving prescreened offers can do so through their credit bureau.
Marketing Practices
Banks try to lure college students into applying for a credit card by offering prizes and gifts as an incentive for signing up. The most popular technique is giving away t-shirts with the college name across the back. Banks set up tables and booths at college sponsored events. The Sallie Mae study revealed that although only 5% of students obtained their first card through such means, more students may apply for second and third cards through on site campus marketing. In the Credit Card Act, Congress would recommend schools limit the number of locations where cards could be marketed on campus.
Other regulations in the Act:
• Colleges, universities and alumni associations would have to disclose their dealings with credit card companies.
• Banks would have to disclose their deals with schools and file annual reports to the Federal Reserve Board.
Young Consumer Education
Credit card education is an important factor in helping stem the tide of youth falling into debt. The Credit Card Act requires that as part of new student orientation all students receive a credit card and debt management course. The Sallie Mae survey found that 84% of the college age respondents said they were interested in some type of financial literacy course.
Start Young
With credit card debt on the rise in the general population, the new provisions in the Credit Card Act seek to aid parents and teenagers as they venture into the sometime treacherous waters of owning a credit card. While some students and banks may chafe at the restrictions placed on them from the new bill, it will go into effect February 2010.
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- New York investigates credit card marketing to students
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