Story URL: http://news.medill.northwestern.edu/washington/news.aspx?id=130647
Story Retrieval Date: 5/24/2013 12:21:47 AM CST
WASHINGTON – It’s no secret the credit card industry has long indulged in less-than-upstanding businesses practices when it comes to marketing to one must-have demographic - college students.
But the days of offering up free gifts like pizza and T-shirts in exchange for a completed credit card application are numbered. This week, the Senate voted overwhelmingly for comprehensive credit card reform, including provisions that will severely limit the way credit cards are marketed to people under 21.
“A number of young people not only face high credit card debt, it’s on top of the high cost of going to college anyway, with student loan debt, co-pays on their infirmary and health care to go to college, the high cost of textbooks. I could go on,” said Ed Mierzwinski, a consumer advocate for U.S. Public Interest Research Group.
Under the new legislation, which is expected to be signed into law by President Barack Obama by next week, credit card companies are barred from issuing cards to anyone under 21, unless those people have a co-signer or proof of ability to pay.
“This is definitely a big victory for us. I think this is going to rein in these egregious practices, especially for college students,” said Alex Bodaken, a student at the University of Wisconsin-Madison and a credit card reform advocate.
So where’s the catch?
Some critics argue that the bill’s provisions limits young people’s access to credit, effectively punishing some for others’ mistakes.
“We understand that policymakers felt a need to provide additional benefits for this age group, but the net result will be that responsible adults in this age group will be limited in their ability to get a credit card,” said Peter Garuccio, a spokesman for the American Bankers Association.
A House version of the bill, which passed last month, also has limits: Full-time college students between 18 and 21 cannot get credit that exceeds $500 or 20 percent of their annual income, unless a parent, guardian or spouse of a college student assumes joint liability for debts associated with the card.
“What does that mean for someone who doesn’t have a parent or guardian in the picture?” asked Lynne Strang, a spokeswoman for the American Financial Service Association. “You’ve now created a system of some having access to cards and some not.”
Bodaken, who just completed his freshman year and has had unsolicited credit card offers, said he understands the critics’ points but he thinks protecting consumers is too important to sacrifice for the few with limited access.
“You have to keep the balance of personal freedom and common sense laws that keep people out of debt, and I just think that the balance is too far toward personal freedom, and we’re trying to move the scale,” Bodaken said.
Not everyone agrees with re-tipping the scales
“It’s like they’re trying to be our parents or something. Why can’t I be treated like every other adult?” said Jonathan A. McCulfor, a sophomore at Rose-Hulman Institute of Technology in Indiana. “I feel like I’m old enough to make my own responsible choices.”
The passage of this legislation comes less than a month after Sallie Mae released a report that 84 percent of undergraduates had at least one credit card, as compared to 76 percent in 2004, the last time the study was conducted.
And the number of college students holding balances on credit cards is continuing to climb. The average balance grew to $3,173, the highest in the years the study has been conducted.
But Garuccio questioned the validity of that data.
“I’m not saying that study is worthless, but they looked at a very limited universe of students. They only looked at people who were 18-24 years old, which doesn’t account for 40 percent of the student population in this country. And they only looked at those who applied for some sort of student aid, which doesn’t account for roughly two-thirds of the students in this country,” he said.
Garuccio said that the students surveyed are part of a demographic most likely to use credit cards, and he worries that legislation that limits the availability of credit cards could be dangerous for those already strapped for cash.
Senator John Kyl, R-Ariz., one of only five senators who voted against the reform bill, said in a statement released on Tuesday that he opposed the measure because he was concerned about “the unintended consequence of restricting credit to those who need it most.”
“Any legislation or regulation that restricts the ability of credit card issuers to adequately price risk could have a direct impact on everyone with, or wanting, a credit card,” Kyl said. “Financial institutions must be able to price those risks or they won’t be able to continue to offer as much credit as individuals need. In that case, everyone suffers.”
So, wait, who’s responsible now?
Perfect or not, the legislation has been lauded as a success by consumer advocates, students and lawmakers alike, even though a measure to allow guns into national parks was tacked onto the bill as a very unusual last-minute amendment.
But Strang warns against viewing the bill as an excuse to go hog wild with credit.
“A credit card isn’t free money,” she said. “That ability to overextend yourself still exists; it’s not diminished because there’s now a parent’s signature in the picture.”
The legislation goes beyond less-restrictive regulations passed by the Federal Reserve last year, which would go into effect in July 2010. The new restrictions will go into effect nine months after Obama signs the bill.