The regulations governing student credit cards are essential for any young adult and parent to know. These laws protect teens and young adults from building up too much debt at too young an age. These restrictions also keep credit card companies from using deceptive methods on unsuspecting teens.
About the Regulations Governing Student Credit Cards
In 2009, the Credit Card Accountability, Responsibility and Disclosure Act -commonly known as the CARD Act- went into law. This federal regulation helps to limit the availability of credit to young adults, specifically as a way to help prevent students from accumulating significant amounts of debt. The law affects all people under the age of 21. In addition, the law helps to prevent lenders from using deceptive methods to lure in young credit card users with credit products that typically offer high interest rates, penalties and fees.
Age of the Borrower
This law prevents those who are under the age of 21 from easily obtaining credit. In order to do so, the borrower must meet one or both of the following requirements.
- The borrower must have proof of income to support the amount of credit he or she is applying for from the lender. Proof of income may include tax reports, payroll stubs or other physical evidence.
- The borrower can alternatively obtain a cosigner to obtain a credit card. The cosigner, who must have a satisfactory credit score, must be over 21 and accepts responsibility for repayment of the debt should the borrower default.
In addition to this, lenders also cannot solicit credit card offers to those under the age of 21, knowing the student is of that age. To overcome this, a borrower can request lenders to send offers. This is the process of agreeing to be on an opt-in list with the lender.
Prior to the establishment of the CARD Act, it was common to see credit card companies on college campuses. Often, the student would receive a free t-shirt or other merchandise for filling out a credit card application. Under the new law, though, this is no longer possible. Credit card companies may not offer merchandise, free items or other items to college students on college campuses or at other student events.
In some cases, credit card lenders may request permission from the school to market to older students. To do so, the company is likely to be allowed only to market in specific areas of the college campus, often where senior students live or are present.
Minimizing Available Credit
Yet another effect of the CARD Act is the limit on the amount of credit students can have if the student is under the age of 21. The law states that those students who do obtain credit may only have a credit limit up to $500 or equal to 20 percent of the student's income. This income, as stated previously, must be verifiable, regular income. In addition, the total available credit limit across all credit card offers must be no more than 30 percent of the student's total income.
Students Obtaining Credit
One of the limitations some believe this law places on students is the availability of credit cards to use for payment on and off campus. A parent, for example, may not wish to provide the student with a significant amount of cash to carry around school. Others believe this law restricts the young adult from building his or her credit score at a young age, thus hampering the student from obtaining lower-interest rate cards later on in life. There are ways around these limitations.
- Apply for a prepaid card. A card allows the user to use the card as a credit card, but without accumulating any debt. The student may only spend up to the available balance. Parents can add to the card at any time.
- To build credit, consider the use of a secured credit card. This type of card reports to the credit bureaus each month, which allows the student to build his credit history.
- For even more access to using a card for purchases, open a checking account. Request a debit card with a Visa or MasterCard logo. This allows the student to use the card anyplace accepting those cards.
The regulations governing student credit cards allow students to finish school without a significant amount of unsecured debt. This can offer the student a better start out of school.