Maxed out student credit cards might soon become a thing of the past.
Or, at least that is part of the goal of new legislation that is expected to go into full effect at the start of the new year that will limit the possibilities for students under the age of 21 to open credit accounts nationwide. The new rules, which were signed into law by President Barack Obama in May, tighten restrictions on credit card companies trying to raise interest rates and curb the ways in which companies can market credit cards to teenagers and college students.
Underage students will have to prove they have the essential assets and income to pay off a credit card, and banks will no longer be allowed to provide giveaways on campuses in exchange for students opening a credit account.
Jerry Sigler, senior vice president and CFO of the University’s Alumni Association, said the contract the University has with Bank of America will not be significantly affected by the new legislation because it mostly targets alumni.
The University currently has a $25 million, 10-year contract with Bank of America that started in 2004, according to Sigler.
As reported in The Michigan Daily in February, under that contract, the Alumni Association provides Bank of America with student and alumni information in exchange for revenue for the Alumni Association based on the number of credit card accounts opened.
Sigler said the Alumni Association has been working with Bank of America over the past several months to develop plans to modify the way the bank works with the University to fit the terms of the legislation. This includes terminating direct mail marketing to students — which Sigler said Bank of America hasn’t done in over a year — and not setting up tables around campus as the bank had done in the past, though there will still be tables in Michigan Stadium.
Though the Alumni Association will be required under contract to make these changes, Sigler said the changes aren’t far from the way things are already run.
“The kinds of changes they would need to make in their marketing campaigns more or less are already being made,” he said.
Sigler said the new legislation will just reinforce the main goal with the Bank of America agreement, which is to market the bank’s card to alumni. He acknowledged, however, that current students are also eligible for the card, but the bank’s direct targeting of students will now be more limited.
Under the current Bank of America agreement, there are 73,000 alumni accounts open and 1,500 student accounts open, according to Sigler. So long as the 10-year contract remains in place, the revenue from these accounts will remain constant. The legislation could affect the terms of a possible future contract, though.
Christine Lindstrom, director of the Higher Education Project on debt conducted by the United States Public Interest Research Groups, said there are two key provisions within the CARD Act that will protect students as consumers.
The first condition Lindstrom highlighted is the issue of tabling and handing out giveaways in exchange for opening a credit account, which will no longer be permitted on campuses after this legislation comes into affect. Lindstrom said that without giveaways, students will be more focused on the terms and conditions of the credit agreements they’re signing.
The second condition is that students under the age of 21 must have a cosigner or be approved via a financial background check prior to being approved for a credit card.
Lindstrom said the need for students to show income or assets before being able to obtain a credit card without a cosigner is also a major component to the new legislation that will enable students to be educated consumers.
“Previous to this point, students in college were the only consumers who weren’t held to a standard of what your income and your assets are,” Lindstrom said. “And based on your income and your assets, we will then give you an interest rate and a credit line, and that basically is the way it works for every adult in society except for students.”
Another important component of the legislation that will help lower student credit card debt is the opportunity to lower penalty interest rates over time, Lindstrom said.
“That’s huge and very significant in terms of decreasing debt because that’s not the case now,” Lindstrom said. “By giving the cardholder some ability to proactively fix the problems that they had, to get out from underneath the penalty interest rate, you can lower the debt that that person would otherwise face.”
Lindstrom said she sees the necessity of a cosigner as essential in protecting students from debt they would otherwise be susceptible to acquiring if there were no background checks on assets.
“If you’re qualifying for credit that you can’t afford, of course you’re plunging yourself into deeper debt than you otherwise should be in,” Lindstrom said.
In U.S. PIRG’s Campus Credit Card Trap Study, conducted from October 2007 to February 2008, 66 percent of students had at least one credit card. Out of that number, 30 percent had a cosigner or their parents paid their credit card bill. For those students who paid their own credit card bills, 36 percent paid their bills in full each month, while 34 percent carried a balance.
Peter Garuccio, senior director of public relations for the American Bankers Association, said the provisions of the CARD Act are going to drastically change the nature of the credit card industry.
“Really when you look at all of the provisions en masse, in all, it really requires a new business model,” Garuccio said. “They’ve got to change their operations, they’ve got to change their marketing, they’ve got to change their risk assessment, they’ve got to change their pricing. They have to change everything really.”
But he added that the effect the legislation will have on students opening credit accounts remains unclear because the Federal Reserve hasn’t yet established well-defined guidelines of how to determine if a student has sufficient income or assets to qualify for a credit card.
Garuccio said the association is awaiting a preliminary rule on those guidelines by the end of the month and a final rule that will be adopted by the end of the year.
“Until we know what that looks like, we don’t know what the full effect is going to be,” he said. “But again, suffice to say it’s going to be tougher for people in this age group to get a card.”
Garuccio said he thinks banks and universities will still partner up through affinity agreements — like the one between the University’s Alumni Association and Bank of America — in the future to create programs that are mutually beneficial to each party.
But he said not many students actually open credit accounts through campus displays because programs are geared toward alumni — as is the case with the one at the University.
Some students said they think the new legislation requiring those under 21 years old to have a cosigner to open a credit account will protect students from piling up debt and from overcharging on items they can’t afford.
LSA sophomore Paige Tibbits said she is waiting to get a credit card until she is older because she doesn’t want to rely on it to make payments.
“I kind of agree with that because if you don’t have any source of income or any way to pay off a credit card, you could put yourself in a serious financial situation that could potentially damage your future,” she said. “It makes sense that if you don’t have a reliable source of income, why should you have a credit card?”
But some students, like LSA junior Rachel Rickard, think people under 21 years old should be able to open their own credit accounts without a cosigner.
“To me that seems kind of ridiculous because I don’t have a job during the school year; I only have a job during the summer,” Rickard said. “And I have a credit card and I can pay it off.”
Rickard said she uses her credit card for certain educational expenses, like textbooks, in order to build up her credit history.
“Basically I use it so I have established credit now, and I never pay for anything with it that I know that I don’t have the funds to pay back,” she said.