The CARD Act has a provision that puts some limitations on marketing and granting credit cards to folks under the age of 21.
The provision in question is pretty simple — if a person applying for a credit card is under 21, either he or she has to prove independent ability to pay or they must find a co-signer. Whereas Congress probably intended that parents and older siblings would be the designated co-signers, it would appear that we have reverted to the 60's and rather than being asked to buy beer for under-aged minors, older students and friends are now being asked to co-sign for their credit cards. Ah, the unintended consequences of unintended consequences.
There has been serious debate on the issue. Some take the position that young people should have an opportunity to begin to build a credit history on their own from the age of 18 —and not be forced to wait until they are 21. Denying them the ability to do so puts them at a three year disadvantage relative to 18 year olds pre-CARD Act. Others, my bet —the majority, argue that drastic change was required because so many students who were issued credit cards simply because they could fog a mirror —without demonstrating an ability to pay and without a co-signer breathing down their necks— found themselves mired in crushing debt, suffering with credit scores that were hammered for up to ¾ of a decade, and forced to dig out of a deep financial hole for up to seven years after graduation. This is a time which should have been used to solidify their financial foundation rather than wasted years struggling to rebuild it.
We at Credit.com believe that Congress got it right. However, being the notoriously open-minded people we are, we decided to see what folks really thought. On January 14, 2011, at our behest, GfK conducted a poll asking whether someone under the age of 18 should be entitled to get a credit card on their own. The response was a resounding 88-12 against the concept. While I seriously doubt that too many credit card or banking executives were part of the sample, one might say the number speaks volumes. Hell, that is ever-so-slightly higher than the spread of the final score of the University of Wisconsin-Indiana University football game last fall (all due respect to Indiana).
No one was undecided – ditto, on "no opinion."
I don't believe that this new law is anti-kid. In fact, I believe it is very pro-Gen whatever. Of course, some young folks might believe that it is slightly unconstitutional for Congress to prohibit issuers from providing – either on or near campus–free slices of pizza, t-shirts, or Frisbees (to name a few goodies) as incentives to take an application. Ah well, there goes the food and/or apparel budget for the week!
But, it is not as if a young person is sentenced to the credit Gulag during this formative period of their financial lives without parole. It simply means they have to either step up personally and get a job or get a co-signer. One might argue that the former is best because when you work, you appreciate money more and are less inclined to spend irresponsibly. However, depending upon whom you recruit to co-sign and their perceived level of understanding if you hit the limit, fail to pay and put their credit in jeopardy, there might be the same chilling effect.
So, what are other alternatives if our prospective borrower is jobless or without co-signer? When it comes to establishing credit for the first time, the options are limited … but there are options:
Become an "authorized user" on a parent or relative's credit card. By becoming an authorized user, students essentially 'piggyback' on a parent or relative's good credit history – as long as the account is in good standing, has a low balance and has no negative payment history. Because authorized user accounts are reported, just like the primary account holder's, the student gets all of the benefits of a positive credit card account with none of the payment liability. This is a great way for parents to monitor their child's spending and introduce them to the world of credit, its benefits … and its risks. The drawbacks? As the primary account holder, the parent or relative is legally responsible for all of the authorized user's charges. If it gets out of hand, the primary account holder is left holding the bag.
Open a secured credit card. Secured credit cards are another great way for students to earn and establish credit, without the need for a co-signer or income verification. And because they're secured, they're much easier to qualify for. With secured credit cards, the student secures the credit card with an upfront cash deposit equal to the credit limit on the account. Secured credit cards are still subject to the same guidelines outlined in the CARD Act for traditional credit cards, however the upfront security deposit meets the requirements in proving the student's ability to pay.
Secured cards do, however, carry drawbacks:
Cash up front. Most secured credit cards require a minimum cash deposit of $200-$500 to open the account. For this reason, credit limits on secured credit cards are often quite low. Plus, the student has to pony up a large amount of cash – up front.
Watch your limits. Because secured credit card limits are typically low, it doesn't take much to "max out" with only a few purchases. With that in mind, it's also important to keep the balance low in proportion to the credit limit (known as the utilization rate) because this ratio is a factor in your credit scores. Keeping your balance at 10 percent of your limit – or less – is best if you want to build a good score.
Reporting to all three bureaus. When choosing a secured credit card, choose one that reports to all three of the major credit reporting agencies. If it's not reported, it's not included in your credit reports … and you won't get credit for establishing the account.
Adam Levin is chairman and cofounder of Credit.com. His experience as former director of the New Jersey Division of Consumer Affairs gives him unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity theft and credit.