When President Obama signed the Credit CARD Act (short for Credit Card Accountability, Responsibility, and Disclosure Act) into law in May 2009, one of his hopes was that the new regulations in the law would help stop young people from accruing a heavy burden of debt before they even had a chance to finish school and start on a career path. Of chief concern were issues such as secret marketing agreements between credit card issuers and colleges, sneaky campaigns to sign college kids up for credit cards even if they had no proven income, and rising student debt.
These aggressive marketing tactics by lenders on college campuses were meant to be curbed by the reform, with new regulations including the following:
- Credit companies could no longer give things away on college campuses (no more free notebooks, pens, or Frisbees emblazoned with the name of a credit card)
- Minors could not get a credit card without a co-signer or a proven “ability to pay” for credit card charges
- Credit bureaus would not be allowed to give out addresses of young people for mailing or marketing purposes
- Schools and companies were required to publicly disclose any contracts or marketing agreements with credit card companies
First Study of CARD Act Gives it a Failing Grade
However, in light of a new study by University of Houston Law Center Professor Jim Hawkins, which will be published this fall in the Washington and Lee Law Review, these regulations have had little effect in actual practice. He and his team studied responses from over 500 students, as well as 300 agreements between credit card issuers and schools or alumni associations. The study will be the first to offer hard numbers on the efficacy of the Credit CARD Act, and the initial reports are not encouraging to those hoping it would provide real reform.
The study showed that most students are still approved for credit cards quite easily, even with no demonstrated ability to pay back debt any incurred. What does an unemployed student put down on a credit card application under the “income” section? Hawkins` study showed that 31 percent of college students listed student loans as income when applying for credit cards.
Of 41 students surveyed, 23 of them applied for a credit card with a co-signer (a parent in nearly every case) and 18 of them applied on their own. Sixty-eight percent of the applicants listed their income as under $10,000 a year and 35 percent of those under age 21 listed money from relatives as income. Forty-eight percent of applicants didn`t list income at all, citing “other sources” as means to pay.
It`s Payback Time
When it comes to debt repayment, the CARD Act regulation has a loophole that requires only that students show ability to pay the monthly minimum balance due on a credit card, not the entire amount. Additionally, banks are allowed to define for themselves what constitutes an applicant`s “ability to pay.”
Hawkins says that, “Based on this survey and study, I found that many of the CARD Act`s student and young consumer provisions have not affected credit markets in the ways the Act`s proponents had hoped.” He says that the provision prohibiting credit bureaus from sharing student addresses didn`t go far enough, since it doesn`t ban companies from mailing things to students but simply makes it harder for them to get addresses. “If Congress was concerned about people under 21 receiving credit card offers in the mail, it could directly prevent that conduct by making it illegal to mail anyone under 21 a credit card offer,” Hawkins said. Sixty-eight percent of students under age 21 said they received credit card offers in the mail last year.
Education, Not Legislation?
Credit-Land.com has always been a proponent of credit card and financial education for young people. Last year Credit-Land.com editor-in-chief Michael Germanovsky founded the Student Credit Card Education Initiative, featured in Forbes, Business Insider, the New York Daily News, and the Huffington Post. If legislating the behavior of credit card companies doesn`t stem the tide against rising student debt, the key will be for young people to educate themselves and make good financial decisions that will allow them to use credit cards as tools that benefit them, rather than burdens to be paid.