Credit-card bill could hit students hardest
Young consumers are easy prey for predatory credit-card issuers. They are relying on their plastic more than ever.
By Gail Russell Chaddock | Staff writer/ May 19, 2009 edition
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Rich Clabaugh/Staff
Washington
The credit-card reform bill expected to clear the Senate Tuesday signals big changes in how Americans use credit, but no group will feel the impact of these changes as much as students and consumers under age 21.
On the one hand, the new law promises them the same protections it promises to the nation as a whole: more transparency, less-arbitrary rate hikes, fewer surprises in the small print. It also adds special protections for young consumers.
But may this may come at a price: less access to credit, especially among young people – precisely at a time when they are becoming more dependent upon it. Half of college students have four or more cards and are carrying an average balance of $3,173 – a record, according to the most recent survey on credit-card usage by student-loan giant Sallie Mae.
“The bottom line is that young adults are plunging into credit-card debt, in particular, on campus,” said Christine Lindstrom of US PIRG, a federation of public-interest groups, during a teleconference Monday to support passage of the bill. “Unfortunately, on campus, however, they’re targeted with cards that have terrible terms and conditions, and these cards are aggressively marketed to them.”
The Senate version of the bill bans credit-card companies from issuing cards to consumers younger than 21, unless a parent agrees to accept financial liability for the card or the applicant can show an independent means to repay.
In addition, it limits preapproved offers of credit to young consumers and prohibits increases in the credit limit unless someone who is jointly liable approves the increase in writing.
A House version of the bill, which passed on April 30 on a bipartisan 357-to-70 vote, bans issuing credit cards to consumers under age 18 unless a parent or guardian is the primary account holder or state law allows it.
For full-time college students between the ages of 18 and 21, credit extended in any year may not exceed either $500 or 20 percent of the student’s gross income.
Harder economic times have brought mounting calls to curb predatory lending directed at students. In extreme instances, students are being forced to drop out of school to catch up with their credit cards.
“It’s our understanding from the colleges we hear from that they are understandably distressed over the number of academically sound students who have to drop out of school to service their credit-card debt,” says Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling in Silver Spring, Md.
Nearly one-third of college students put tuition on their credit cards, up from 24 percent in 2004, according to the Sallie Mae survey. More than three-quarters carried a monthly balance and the fees that go with it. [Editor’s note: The original version attributed the Sallie Mae survey to the wrong organization.]
Consumer groups and some student activists say the reforms will be a boon to students, who often rack up unsustainable balances and fees without fully understanding the financial burdens they are taking on.
“Just because credit-card companies are taking a hit … doesn’t mean that they should be allowed to give thousands of dollars to young people with no way of paying it back,” said Carmen Berkley, president of the United States Student Association, also on the teleconference on Monday.
“Of course, students still need credit cards,” she said. “I myself received a credit card at 18 with a consolation prize of a T-shirt. I needed it for food, for books, for living expenses.”
The shock came when she reached her credit limit and interest rates skyrocketed. “Then, I had no way of paying it back,” she added.
Tessa Atkinson-Adams, a senior at the University of California, Santa Barbara, recalls seeing an invitation for free pizza at a restaurant just off campus during her sophomore year. “Credit-card companies were banned from setting up tents on any UC campus, but they found a way around it,” she says.
“Turns out, you had to fill out a form to get the pizza,” she says. “It was a credit-card application, and I still get e-mail almost every day from all these different credit-card companies, just because I wanted to get a free plate of pizza.”
But banking groups say the legislation could wind up harming the consumers it seeks to help by reining in credit to young people who need it.
“It doesn’t strike the right balance between enhancing consumer protections and ensuring that credit cards remain available,” says Peter Garuccio, a spokesman for the American Banking Association. “Clearly, it will limit their access to credit.”
It also represents government meddling, some say. “Should the government be treating you differently if you’re 20 or 22?” says Mark Calabria, director of financial regulation studies for the Cato Institute, a libertarian think tank in Washington.
“The purpose of any form of credit is to borrow against your future earnings in order to enjoy some consumption today,” he adds. “Whether that consumption is in the form of textbooks or beer and pizza should be left up to the individual – we are talking about adults here – and not the state.”
Comments
2. Curt Fisher | 05.19.09
The story didn’t address one of the most popular ways students burn all that excess credit that they don’t need–alcohol!
3. Don Hurtmyselfesteem | 05.19.09
Imagine having to pay back money you borrowed?! They do not NEED a credit card. Having to drop out of school to “service” a credit card debt is merely what their profs call social darwinism. There is no free pizza kiddies.
4. w austin | 05.19.09
Unfortunately, many young people are not mature or wise enough to use credit cards. Not to be cynical, but I think that is why the banks target young people. They spend without thinking about the consequences.
5. Ace | 05.19.09
Perhaps today’s students will “resort” to the same payment plan that dozens of generations of students did: get a part-time job.
6. Ron Scheurer | 05.19.09
Fancy accounting. Banks reduce your credit limit because you do not use the card enough or have high unpaid balances on which they can collect interest. It has nothing to do with your credit rating. What that allows the bank to do is extend credit amounts for the difference between your old allowance and new allowance to someone who is less likely to pay off the charges every month. These debtors end up paying high interest charges back to the bank whereas they got nothing from card users who paid off every month.
It also keeps the bank within any lending limits the government may set on credit cards. In effect, the bank’s house of cards gets propped up by more mirrors.
7. MarkusR | 05.19.09
I’m a full-time worker with a family of my own, and putting my self through a 4-year degree program (hopefully to get done within 5 years). As many credit cards as I have, I do try not to use them too much. I go for other forms of financing such as loans.
If students cannot afford the college they need then other forms of financing should be pursued, not credit cards. A variable rate balance when you know you’ll be broke for many years to come is not the way to invest in your future. If CC companies want to “help” student, provide them with fixed rate for 5-years (or so).
8. George DeGroot | 05.19.09
It is about time the government has decided to put a stop to the “highway robbery” fees and interest rates the banks have charged consumers. They pay little to no interest for consumers’ money deposited in checking accounts or savings accounts. However, the banks charge 9% to 29% on money charged to a credit card and thus making it almost impossible to ever repay the amount via installments.
It is also time that banks be admonished and prevented from preying upon our younger citizens through the use of tactics similar to those cigaret companies used to get young college students and servicemen hooked on smoking. Our government is there to help protect our welfare and protect us from predators who would financially enslave our younger citizens.
9. K von M | 05.19.09
I agree with fiendish. How can preventing college students from destroying their credit and digging themselves into debt they can’t repay be a bad thing? Most college students haven’t even had a chance to establish themselves independently, and don’t realize that a credit card is not just a swipeable plastic free-for-all. All I see are the banks whining that their easy access to jacked-up interest rates and sky-high fees is being unfairly taken away. Maybe if they hadn’t screwed so many people over they wouldn’t be subject to these long-overdue practice restrictions.
When I was in college, the credit card companies would offer fund-raising opportunities to the frats and sororities. For every “form” (meaning application) that someone filled out, the frat/sorority got $1 and the person got a toy or bag of candy or something. There was no limit on how many people could fill out. I knew that with my tiny part-time income I’d never get approved for any of the cards so I filled out as many as I could just to get the free stuff. It wasn’t until YEARS later that I found out any inquiries on your credit report over 2 per 6 months drives your credit score DOWN because of “too many inquiries.” I hadn’t done anything wrong, hadn’t charged anything on any card, and yet I’d already destroyed my credit because nobody disclosed that little fact.
Credit cards should only be for those who are responsible enough to know how to use them and have the means to pay back the charges.
10. mike | 05.19.09
The continuing student credit card saga( described in ‘Credit Card Nation’ circa 2001 ) is just one facet of the broader student credit debacle, which I’ve been following for many years. From my reading I know that many if not most big schools have been fully complicit in this. I’ve thought that this is best described by just saying we( the banks, that is ) are eating our young, in fact feasting on them. You may know this is consistent with what’s been going on in the broader financial realm, in case you’ve been paying attention. A few worthies like Prof. Elizabeth Warren have tried to get a handle on what has transpired, but how many have even heard her name ?
My local, large credit union in Tucson, Az., which was once dedicated to serving teachers( and did a good job of it ) has recently started issuing Visa ‘gift cards’ to teens aged 14-17, to help them learn ‘financial independence’. Can the end be far off ?
11. Mary | 05.19.09
Please. I didn’t have my first credit card until I was in my mid twenties.18 year olds do NOT need credit cards. Why are they not being taught money management, or credit cards?
The need to use it to pay tuition points to a lack of options to finance college education that is very troubling. This generation is paying for the irresponsibility of the 1960s and 70s generation of college students who received student loans and never paid them back even when they could easily afford to. Working your way through school is always option except that students from economically distressed families end up dropping out due to family pressures (especially males,)and it may take 5+ years just to get an undergraduate degree.
12. Mike Gentile | 05.19.09
If people under 21 are not able to make good credit decisions as some have suggested, than move the adult age in this country to 21. Don’t say a person is a adult at 18, but not allow him to drink or have a credit card or rent a car.It is amazing how people under 21 are called adults by are goverment but don’t have the same rights as a person who is 21 are older.
13. A. Finney | 05.19.09
“The Senate version of the bill bans credit-card companies from issuing cards to consumers younger than 21, unless a parent agrees to accept financial liability for the card or the applicant can show an independent means to repay.” …and where is the problem with this? Either the applicant shows an independent means to repay (which means get a job) or a parent agrees to accept financial liability for the card (meaning a co-signer) …. This is the way it should be. If I don’t make a payment on a credit card, I get a call from the creditor. If I don’t make multiple payments on a credit card, I get hounded! Students need to be focusing on school, without being hounded by credit card companies. The cost of going to school is something that should have been figured out prior to enroling. Cash from mommy and daddy would be the prefered answer, and if that doesn’t happen, then get a job like we did in the “olden” days… If your too lazy and or irresponsible to do that then there are Grants, and / or Student Loans. Credit card debt without a means to pay it back, is out of the question.
14. Ken | 05.19.09
Maybe if the colleges were to get out of the money making business and back into the education business things would be better. At Portland State University in Oregon your student body card has a Master Card Logo on it. Education costs are rising as fast or faster than the cost of health insurance and we just keep feeding the monster by increasing financial aid and student loan limits.
15. Teddi Curtis | 05.19.09
Considering the recent statement by a prominent Senator that the banks own Congress I am not expecting any actual reform. And giving the banks a year or two to implement that “reform” is only making matters worse. They are using that time period to squeeze every dime they can out of their customers — just in case.
16. Zach | 05.19.09
Speaking as a college student who pays his credit card balance in full every month, some of these comments are frankly ignorant. No one denies that many college students get themselves into problems with their credit cards. However, this is by no means a problem limited to college students. Plenty of older adults also do not seem to have grasped that spending comes with consequences. For example, I do not believe college students provoked the current recession with THEIR inability to look at long-range consequences. And what is this claim that we don’t (by and large) have part time jobs?
We can surely have a debate about how much credit should reasonably be offered to those with no credit history without resorting to calling college students lazy spendthrifts, right?
17. Chris | 05.19.09
The elephant in the room is that everyone, let alone students, is struggling to maintain a middle class lifestyle while the price of that lifestyle goes up and wages remain stagnant. Predatory creditors are not the problem, they are a symptom of a have and have-not economy. These predators would not exist were there not a desperate market for their services.
18. Iculus | 05.19.09
And while we are at it, let’s raise the voting age to 21 - if you can’t understand a credit card offer or terms, you’re likely to be clueless when it comes to important issues of public policy.
19. Jamie | 05.19.09
It’s always amusing to see the industry defend its many-billions-a-year profit margin, garnered from abusive fees on people with no possible ability to dig out of debt, as being a public service.
As many of you have said, it’s no gift to someone to induct them into a world of financial slavery. One might as well claim civic activism in helping addict prostitutes to drugs so that they could be kept under easy control to fill customer demand. *shakes head*
20. richard potter | 05.19.09
Extending credit to students is not the real issue. Predatory tactics with advertised “free” interest gimmicks and unfair lending practices is the important problem. Credit card companies should be willing to purge the interest rate and allow students the same access to credit using the same standards as adults. Irresponsible use of credit is just as wrong at any age, but students need protection from the predators.
21. CJ | 05.19.09
Nearly 30 years ago, I had to “establish” my creditworthiness before I could even think of getting a credit card. It started with buying a sofa with in-store financing, then getting a department store card, then finally my first Visa about a year later! I was about 22. Was this the result of a financial industry that was far more responsible to it’s stockholders and customers than it is today? I believe so. I’m sure they made good money back then without fleecing vulnerable college students (don’t forget, the human brain isn’t fully developed until about the age of 25). They don’t need to make the OBSCENE money they make today.
Public financing of post-secondary education would be another great way to keep the slimy credit card industry at bay. Sheesh, what a concept.
23. Anon Ymous | 05.19.09
I love the comment by those opposing the credit card bill “Should the government be treating you differently if you’re 20 or 22?” says Mark Calabria. Are we to assume that Mark is off trying to modify the drinking ages imposed by various governments? Another case of being treated differently depending on age but I don’t hear any complaints from him on this issue (perhaps he’s not representing the beer industry…..
24. Alan Collinge | 05.20.09
Credit cards are bad, to be sure. But, at the end of the day, there are standard consumer protections such as Bankruptcy, and statutes of limitations that ultimately compel the lenders not to overlend.
Student loans are the true predatory debt instrument for college students that CSM needs to investigate. No Bankruptcy, No Statutes of limitations…Lenders have been caught defaulting students without even attempting to collect on the debt, and about 1 in 3 borrowers will ultimately default on their loans. This is the issue that CSM has failed to do anything significant on, but should.
25. Elgog Partynipple | 05.20.09
Imagine the credit card industry being so concerned about thier customers. This out pouring of concern is so sweet. These poor students won’t have credit cards to ruin thier lives for years to come. Maybe having a credit card should be part of thier education to what real life is all about? Maybe they should understand that evil companies are trying to squeeze every last cent out of them and anyone related to them? Maybe they should understand that signing a piece of paper can have long term consequenses and they can sit up nights worrying, not about thier final exams, but about where they will get money to pay thier credit card debt and food in the same month? What an education that is. Now they are just like mommy and daddy.
26. Matt | 05.20.09
You are legally an adult in this country at age 18. While it is true that young people are not the most fiscally responsible age group, their right as an adult to have a credit card should not be infringed upon by the government. PARENTS (not the government or schools like we all like to put the blame on) should teach their children money management skills when they are young and encourage them to make smart decisions with credit cards. I am a 22 year old college student; my father warned me when I got my first credit card at 18 years old about the high rates and preditory tatics. I have always made my payments ontime. Again, I agree that this companies are preditory, but parents should take some part in educating their children and stop leaving it to the government and education system.
27. Jean | 05.21.09
I thought it interesting that the Christian Monitor had the most negative headline I’ve see regarding this bill. Other papers characterized the bill as “student protections” or “reining in credit card abuse”.
Perspective is everything.
28. Lorena | 05.23.09
Being a full-time college student myself, I definitely agree the way that this bill is restricting access to easy credit. I personally have one credit card, and I try not to take advantage of it. I make all my payments on time, and usually pay it all off within the next month. I do know more students who are just swipe-swipe-swiping away, not having the slightest clue what they are doing. I work full time hours and I’m still going to school, so a credit card is good to have in case of emergencies.
My sister started early on with credit card debt in college. She decided to apply for a credit card because she thought the guy at the table was “cute”. She was approved for a $10,000 credit limit (mainly because my mom and she have the same identical name) and was up to her ears in debt. I definitely do not want to be in her situation right now.
I just hope that those older than I don’t judge college students into one big plastic-hungry group. There still are some of us who actually are responsible with their money and don’t want to drown in debt!
29. Erin | 05.28.09
I’m 17 and graduating high school in a month and have a question. What happens in 4 years when I graduate and try to enter the “real” world without a credit score? I won’t be able to buy a car, or get an apartment because the first thing that they check is your credit score. What if I don’t have a parent who will co-sign? Maturity comes with knowledge, not age (I just spent a semester trying to teach my economics teacher the basic concepts of her class). This protection is going to be more of a hobble than a shield.
30. Todd | 05.30.09
As much as I hate how predatory credit card companies are and believe they need to be reeled in, it’s hard for me to believe the gov’t coming to the rescue will fix the problem. It’s ‘we the people’ who need to do something about it.
With capitalism as the model, if there is a business that is bad we should not support it. Unfortunately, that would require a majority of the people that can pay their bills(but get angry at the ones who don’t) to quit using their cards and directly appeal to the financial side of the industry to impose stricter standards.
The ones who can’t manage their credit need to be schooled by their peers, not have the gov’t make rules to protect their ignorance.
A note to Erin: You can do a lot to get and raise a credit score with a $300 limit. Use it a lot and keep it paid off. Another thing if you can get a personnal loan, no matter how small, get it put the money in an interest bearing account and then pay it off when or before it is due. Cheers!!
31. college student | 06.03.09
Honest more than half of the people commenting are adults, so they really shouldn’t have a say in this. I have had a credit card since I was 18 and have had it for almost three years now, I have never had a problem paying it off even when I lost my job, I just had to spend less. If you are not mature enough to pay your bills don’t get a credit card, instead of ruining it for then rest of us. I know many students that are in debt and many that are not, is it really our problem to help them out? We are not the ones who got then debt in the first place.
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1. Bob | 05.19.09
The other deleterious effect of this legislation is that it will hamper programs that work with kids to teach personal finances and credit responsibility. Delaying access to credit until young people are alone and on their own means that they aren’t able to learn and practice responsible use of credit with a parent, school, or youth program that helps them prepare for independence.