On May 22nd, President Obama signed into law the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, which will change the way credit card companies do business. I’ve outlined my thoughts on each part of the legislation, and broken down the effects of the new law according to how consumers use their cards. I’ve also suggested that the new law is unfair to adults under the age of 21 as it prohibits them from getting a card without a parent or legal guardian co-signer or proof of their ability to repay their debt.
Because of that last point, I believe it's likely that secured credit cards will become the card of choice for people under 21 years of age. A secured card is one in which the consumer opens their account with a security deposit equal to their credit limit. For example, if a consumer wants a credit limit of $500, they put up a $500 security deposit to cover their debt in case they are unable to pay their bill. Other than this security deposit, the secure credit card acts just like a regular credit card.
However, the presence of a deposit fulfills the letter of the new law by providing ample proof that the consumer will be able to repay their debt. Thus people under 21 will be able to receive secure credit cards without need of a parent or guardian as a cosigner. If the consumer defaults, the credit card company simply takes the security deposit.
Secured credit cards are optimal for consumers under 21 for three main reasons. First, there’s no need for additional paperwork for cosigners or proof of the ability to repay. Opening the secured account and paying the deposit will alone serve as that proof. Second, other than the security deposit, the card acts just like a regular credit card. This means that opening a secured credit card account will allow consumer under 21 years of age to build up a good credit history. Lastly, having the card will allow the consumer to purchase things when it would be inconvenient to use other types of payment, such as when renting a hotel room, or making purchase on line or over the phone.
Unfortunately, credit history is just as important under the new laws as it was without them, but under the new law consumers will simply have fewer years to build up their credit history unless they can navigate the current prohibitions and get a credit card before the age of 21. I feel that younger consumers will gravitate towards secured credit cards precisely because it will be the most convenient way for them to build credit, and may be the only way to build credit for those who, for one reason or another, cannot get cosigners or proof of the ability to repay.
That's why secured credit cards will become the preferred credit card for students and young adults.