On February 22nd, everyone under 21 will find getting a credit card to be significantly more difficult than it was the day before. On that day, provisions of the CARD Act that will require the under 21 crowd to have “sufficient income” or a legal guardian to co-sign credit card applications. Unfortunately, this will likely cause significant problems for a broad swath of young Americans, resulting in increased lending costs when they leave college. On the student credit card issue, the authors of the CARD Act may have gone too far. And here are just a few reasons why:
Issue 1: Parents with Bad Credit
Requiring a co-signer for young Americans to get credit cards is a good idea superficially. However, more and more adults have credit problems and shoddy credit histories that may make them unacceptable co-signers. This, in turn, may hinder the ability of their children to get establish credit, since a student with minimal income and a parent with a 500 credit score will likely fail to meet underwriting standards.
Issue 2: What is “sufficient income”?
The CARD Act isn’t particularly specific in its definition of “sufficient income.” The way credit card companies interpret “sufficient” may vary widely, leaving the door open for unscrupulous lenders with low incomes thresholds to offer high rate, fee laden cards to those who meet a lowered standard of sufficient.
Issue 3: A Late Start Building Credit
Credit cards, considered revolving loans, play a crucial role in credit score determination. Because many young adults will be forced to delay the start of their credit histories, they will likely face higher rates on credit cards and car loans when they are legally eligible to qualify. This, in turn, may make it more difficult for young Americans to qualify for mortgage loans and saddle them with higher interest rates on a wide range of loan products.
Ultimately, new restrictions on consumers under the age of 21 are likely to create significant problems and open the door for opportunistic lenders to gouge them with higher rates and fees when they are finally able to obtain credit cards and other loan products. Consequently, it may be fair to assert that this element of the CARD Act will hurt those it was designed to protect.
By many measures, student credit card lending had gotten out of control. However, rather than cutting off access to credit, the new credit card laws should have set caps on credit lines based on income and limited credit card companies from bombarding students with multiple cards. Instead, the new laws will deprive young adults of the tools they need to build credit and become responsible credit card users in the future.
-Jeffrey Weber
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