At age 18, Americans become eligible to vote, enter the military, serve on a jury, and marry without parental consent, in most states. But starting in February 2010, there will be one allowance fewer with that milestone: a credit card. On May 22, President Obama signed into law the Credit CARD Act of 2009, a bill that restricts credit card issuers from raising interest rates without warning, penalizing customers who pay on time, and levying excessive fees. There's also a provision that specifically concerns young people: Under the new law, no one under age 21 can get a credit card unless a parent, guardian, or spouse is willing to cosign or unless the underage person has proof of sufficient income to cover the credit obligations.
Speaking on the floor of the Senate in May, Democratic Sen.Barbara Mikulski of Maryland said the bill aims to prevent credit card companies from "targeting college kids to weigh them down with debt before they even graduate." In April, student loan corporation Sallie Mae released a national study that examines the use of credit by undergraduates. The study found that in 2004, 76 percent of undergrads had at least one credit card. Today, 84 percent do. The average amount students say they charged to their credit cards to pay for education expenses (such as school supplies) has increased from $942 in 2004 to $2,200 currently. What's more, 82 percent of undergrads with cards report that they do not pay off their full balances every month, and the median debt among this group is $1,645, compared with $946 in 2004.
Not surprisingly, there has been plenty of debate over whether or not the bill's provisions will actually help young Americans. Here are some of the thorny issues raised by the new law:
Layer of protection? One of the most contentious issues is the role of the cosigner. In the eyes of the bill's supporters, the requirement that a parent must cosign is exactly the kind of help young Americans need to start making better financial choices. "What I like [about the bill] is that it will protect the uneducated—the naive who have not been exposed to the basics of good use of credit," says Mary Ann Campbell, a certified financial planner who teaches a consumer finance course at the University of Central Arkansas. Campbell points out that credit card companies will issue cards only to those with parents or guardians with good credit histories, so there will be an additional layer of authority to make sure inexperience does not lead to massive debt for underage people who have a parent or guardian cosign. Other experts aren't so sure that the bill will really encourage more responsibility. "There's no evidence that someone manages credit cards better at 21 than 18," says John Ulzheimer, president of consumer education for Credit.com.
Others say adding that extra layer of protection can only help, given the high level of student debt in the country. "I'm not sure that it solves the problem, but at least it puts an adult in the loop," says Dan Danford, chief executive of the Family Investment Center in St. Louis. The bottom line: Even if they are financially savvy, underage Americans will have to wait until their 21st birthday to get a credit card unless they have a parent willing to cosign or they make sufficient income to meet the requirements.
Waiting is the hardest part. Waiting until age 21 to have a credit card has drawbacks. Length of credit history—regardless of age—matters when determining a credit score. And those without a credit history will find that renting an apartment or leasing a car on their own is next to impossible. What's more, once someone obtains a credit card, there's a six-month period before the person's credit is considered "scoreable." Even some defenders of the new requirements agree that it's important to start building a credit history early. "If you can't qualify on your own, get a part-time job," advises Campbell.
Offers from "bottom feeders." Another potential side effect of the bill is that credit could be harder to get once young people turn 21. "The bill reduces the opportunity for credit card issuers to cover their own costs on certain higher-risk categories," says David John, senior research fellow at the Heritage Foundation, a conservative policy think tank. First-time borrowers fall into that high-risk category. As a result, issuers may conclude that it's not worth it to send out as many offers and approve as many people as they did before. "A number of the big-name issuers are going to be more reluctant to send a credit card," he says. John says first-time borrowers should be wary of less known issuers that charge lofty fees and will try to court young customers. "They're going to get offers from essentially bottom feeders," John says.
Parents. Cosigners—such as parents—aren't off the hook if their child rings up a large amount of debt and falls behind. "The bank considers the young person and the parent to be equal players. Now you have two people on hook to the payment rather than just one," says Ulzheimer.
Sufficient income? If a young person can't get a cosigner on a credit card, the only alternative is finding a job that pays sufficient income. But what exactly does "sufficient" mean? The law is not entirely clear. The bill states that the underage consumer must submit "an application indicating an independent means of repaying any obligation arising from the proposed extension of credit in connection with the account." It doesn't translate "independent means." John says that it will ultimately be up to the credit card issuers to decide if the consumer has enough income to receive a card.