Card Issuers Face Stricter 'Loco Parentis'

Signing up for a credit card is about to become a lot harder on campus.

Underclassmen once bombarded by offers of easy credit and free T-shirts may find themselves a little less popular among credit-card marketers, as a new law designed to curb the fees and penalties that credit-card companies charge consumers goes into effect.

Later this academic year, the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 will limit how credit card companies market their products to anyone under the age of 21. Its main purpose is to lower the credit-card debt that many college students are strapped with come graduation.

The average credit-card debt among all undergraduate college students stood at $3,173 for the year 2008, up from $1,879 in 1998, according to student-loan provider Sallie Mae's 2009 study "How Undergraduate Students Use Credit Cards." Yet, even as that debt grew, more students were being drawn toward easy credit. In 2008, 84% of college students had credit cards, up from 67% in 1998.

The reforms signed into law in May are designed to slow both of those trends, but they don't go into effect until Feb. 22, 2010. Because the new regulations will make it harder for students under 21 to get a credit card, there is likely to be a run-up in the number of students applying for credit cards between now and February, says Schwark Satyavolu, the president of BillShrink.com, a credit-card comparison site. But lenders might not be as enthusiastic to issue credit cards to college students as they were in the past. The credit crunch and the Credit CARD Act will make giving credit cards to risky borrowers less lucrative, Satyavolu says.

Still, some issuers say they plan to continue their campaigns until they're told otherwise. “For now, it's business as usual,” says Lisa Westermann, a spokewoman for Wells Fargo (WFC). She says Wells Fargo lends to customers who can repay their debts, and the bank considers many factors when approving applicants for a loan, including credit history and their relationship with the bank.

Other issuers say their current campaigns are not in conflict with the law. Mai Lee Ua, a spokeswoman for Discover, says that the company now opens most new student accounts through direct mail and the Internet and doesn't expect to change its approach after the legislative changes.

Desiree Fish, a spokeswoman for American Express, says the company doesn't market to students as other issuers do. “Our focus is more on offering additional cards to students that are on their parents account,” she says. Parents can give their children a charge card on their account and set a unique limit on that card.

Still, several firms will make changes to their marketing strategies in line with the Credit CARD Act, and college students will graduate with less credit-card debt as a result, says Catherine Williams, a vice president at Money Management International, a nonprofit credit-counseling program. Graduating with no credit-card debt and a higher credit score can increase your chances of landing a job (more employers are checking credit scores before hiring), renting an apartment or buying a car, Williams says.

Here are some provisions of the Credit CARD Act designed to protect college students.

For most 18-year-olds, income is a function of a part-time job or an allowance. So, they are often enticed by the added buying power that credit cards can offer, and many quickly find themselves in hundreds or thousands dollars of debt.

The new credit-card reforms seek to eliminate the risk to younger borrowers; once they go into effect, a credit card will not be issued to anyone under the age of 21, unless that person can submit a written application for the credit card that includes one of two requirements:

(1) A co-signer's signature; the co-signer, who will become equally responsible for the credit card, can include a parent, legal guardian, spouse or anyone who is at least 21 years old and can prove they have the means to repay debts incurred on the card.

Or, (2) Financial paperwork that confirms the new cardholder is independently capable of repaying their debts. “Regulators will be coming out with guidelines that will specify what constitutes an independent means to repay,” says Westermann. They'll probably have to demonstrate sufficient income or assets of their own (not their parents') that would enable them to pay their bills by providing pay stubs or tax statements, says Bill Hardekopf, the CEO of LowCards.com, a credit-card comparison site.

One way that the credit-card issuers may help students satisfy this requirement is by offering younger students secured credit cards, says Mark Kantrowitz, who tracks student borrowing and is the publisher of FastWeb.com, a scholarship matching service. With a secured credit card, borrowers deposit their own money with a lender and then get a card with a credit limit set to that amount.

In college, a trip to the mailroom usually means finding tuition bills, birthday cards and credit-card offers. But starting Feb. 22, lenders will no longer be permitted to contact individuals under 21 with prescreened offers for a credit card.

Students who are at least 18 years old, but not yet 21, can elect in writing to have their names and addresses given to credit-card companies that send out such offers.

Discover's Lee Ua says the company doesn't do any direct-mail marketing to students who have campus addresses.

Most borrowers would welcome an increase to their credit line, especially with today's tighter lending environment.

But students often find themselves getting into deeper trouble when they're extended more credit, says Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling. Starting Feb. 22, students under 21 with a co-signer on their credit card won't be able to get an increase in their credit line unless their co-signer also agrees to it.

Many lenders have used free T-Shirts or pizza to lure students into filling out their credit-card applications at booths on campus. That practice will come to an end when credit card reforms take effect.

Issuers won't be able to offer a free, tangible item when a student applies for a credit card on or near a college campus or at a college-related event like a football game or a debate match. “This makes it much harder for credit-card issuers to reach this segment and market to them,” Satyavolu says.

Still, many issuers already have policies in line with this provision of the reform. Lee Ua says Discover doesn't engage in freebie marketing on campus. Stephanie Jacobson, a Chase spokeswoman, says the company doesn't conduct student-focused marketing on or near campuses, including athletic events. And Wells Fargo's Westermann says, “Our current policies and practices support California's Student Financial Responsibility Act that prohibits offering gifts to students for filling out credit-card applications.”

Universities often benefit from credit-card companies' interactions with their student body. As of Feb. 22, a college will have to publicly disclose any contract or other agreement made with a credit-card issuer for the purpose of marketing a credit card.

Often colleges are paid when an issuer sets up a pitching booth on campus, Cunningham says. Colleges also make money off affinity credit cards, which bear the school's name, logo or mascot, Kantrowitz says. With an affinity card, the college gets a percentage – usually less than 1% — of every purchase made with the credit card. Starting in February, every affinity card application will include a clear statement that the school will profit from the transaction, Kantrowitz says.

“Every time you charge that card the college is making money off you,” says Satyavolu. “If you think about every purchase, that could be thousands of dollars a year for one person. And multiply that by tens of thousands of card holders and that leads to significant revenues,” says Satyavolu.

Lee Ua says Discover doesn't have affinity card relationships with any schools.