As college students across the country headed back to campus last month for the new school year, so did the credit card companies. And they're pounding the pavement.
The companies are scrambling to sign up young people for credit cards in a last-minute effort to beat the new credit card law that takes effect in February. Under the new rules, the Credit CARD Act of 2009 will restrict anyone younger than 21 from getting his or her own credit card, unless a parent, guardian or spouse is willing to co-sign or unless the underage person has proof of sufficient income to cover the credit obligations.
Not everyone thinks that's such a good thing. "One of the unfortunate consequences of this new legislation is that it will inhibit otherwise responsible kids from establishing a credit history," said Greg McBride, a senior financial analyst at Bankrate.com, a consumer financial services company.
Olivia Worley, 20, an early childhood education major at Northern Arizona University in Flagstaff, has one credit card in her name and believes building credit is an important step toward adulthood.
"You have to have credit established to buy a car, buy a house and even to set up your bills," Worley said. "Otherwise, your monthly payments are more expensive. If we can be 'legal' adults at 18 and start our own lives, then we need that credit because a lot of young people don't have a lot of money to shell out of pocket."
Will Debt Decrease With New Credit Card Law?
Eighty-four percent of college undergraduates have at least one credit card, up from 76 percent in 2004, according to Reston, Va.-based SLM Corp., the nation's largest college student loan company, commonly known as Sallie Mae.
Natalia Madrigal, 18, an undecided freshman at Arizona State University in Tempe, supports the new law and isn't trying to get a credit card before the law kicks in. "Most of the teens who have credit cards are in debt and I feel that if the law changes the age to 21, then the debt problem will decrease," Madrigal said.
Mary Ann Campbell, a professor of consumer finance at the University of Central Arkansas in Conway, agreed. "This law will force them to be more cautious and responsible," Campbell said. "I've seen many students in much pain over excessive debt that repeatedly tell me they just had no idea it would accumulate so quickly."
Credit Card Co-Signers Required Next Year
The average debt carried by college cardholders stands at $3,173, the highest amount ever, Sallie Mae said earlier this year.
"Parents have been bailing their children out for years," Campbell said. "It has not made sense that students with no job could receive credit and this law will help them learn responsibility."
But McBride of Bankrate.com said that's not necessarily going to be the case.
"Yes, it may prevent some kids from getting into credit card debt but it's not going to solve the problem," McBride said. "Many of those same young people will resort to pay-day lenders or pawn shops in the absence of credit cards."
Among the concerns about the new law is the role of the co-signer.
Jon Vu, 20, a communications major at ASU, said applying for a credit card on his own taught him important lessons about money.
"I learned to manage my finances better and build my credit at the same time without depending on my parents," Vu said. "I can understand why this law got signed but I think it's a shame that young people are going to lose out an opportunity to start building their credit early."
McBride advised parents to think carefully before co-signing with their children.
"At the end of the day, the parents will have to know if their child is a good credit risk or not because, as a co-signer, you're on the hook," McBride said.
Building a Credit History
Marissa Zhu, 19, a political science major at ASU, said the law will end up doing a disservice to young people across the country.
"There are many people from working-class families who have to work to pay for school and may not have parents who can co-sign with them," Zhu said. "A credit history from early on is important to building a better future."
Zhu said she doesn't have a credit card herself but is in the process of applying for one before the new law takes effect. If she waits until February, it'll be another two years before she gets a card.
"I just recently moved out on my own and I see how important it is to have established credit," Zhu said.
McBride of Bankrate.com said that having credit is more important than many people think.
"Building credit has a lot more to do than just your ability to borrow money," McBride said. "It also relates to prospective employers, landlords and even auto insurance companies."
He said they all use a person's credit score as a barometer. "Poor credit or insufficient credit may put more hurdles in the way of getting that first apartment or that first job or lower auto insurance premiums."
But Campbell of Central Arkansas said there are other ways young people can start building their credit now without signing up for a piece of plastic.
"Young people can live without credit cards and some students have told me that's actually their choice because of the financial stress," Campbell said. "There are other ways to build credit, which include not over-drafting your bank account, having a savings account, handling your debit card and opening up private accounts at stores and paying responsibly. There are healthy options to finance your life by living within your means and saving for the future."