New credit rules limit both students and credit companies

Paying with plastic might be convenient, but convenience for college students means payday for credit card companies.

In an effort to curtail the predatory practices of these companies and protect consumers, President Barack Obama signed the Credit Card Accountability, Responsibility and Disclosure Act (or Credit CARD Act) in May 2009, the final rules of which go into effect Feb. 22.

The bill alters the way credit card companies are permitted to conduct business with all consumers, but many of the reforms have major implications for college students.

When student loan foundation Sallie Mae published its latest report detailing student credit-card usage, the results showed a need for immediate change in consumer behavior. The study, published in April 2009, showed that undergraduates were carrying record-high credit card balances.

According to the study, seniors in 2008 graduated with an average credit card debt of more than $4,100, up from $2,900 in 2004. Also, only 15 percent of freshmen avoided any debt and maintained a zero balance on their card, down significantly from 69 percent in the fall of 2004.

“Underage students may not have the experience to manage credit cards responsibly, so they are more prone to be victimized,” said Mark Kantrowitz, founder and publisher of financial aid information site FinAid.org.

Starting Feb. 22, the key provisions of the Credit CARD Act will take effect.

Perhaps the most significant change will be that anyone under the age of 21 will need a cosigner in order to apply for a card or else he or she will have to prove an independent means of repaying any debt. This means most students under 21 will not be able to apply for a credit card on their own, which is likely to reduce the number of students applying for cards each year.

Ben Woolsey, director of consumer research at CreditCards.com, said he believes this will force huge changes in the way many students pay for college.

“Some students may be able to apply with a parent as a cosigner, but most likely, students will have to find a source other than credit cards to make ends meet while in college,” Woolsey said via e-mail.

Another provision of the law limits when credit card issuers can increase interest rates on existing card balances. Consumers whose interest rates are increased can get rate reductions after six months if their bills are paid on time and they do not spend beyond their credit limits.   

Because students will find it more difficult to pay for tuition and other educational expenses with a credit card, a potential increase in student loans could occur. Sallie Mae’s study found that 30 percent of undergraduates put tuition payments on their credit card.


“Student loans would be a better way to finance your education, since credit cards are a very expensive way to finance tuition,” said Charles Delbaum, staff attorney with the National Consumer Law Center.

But tuition isn’t the only educational expense students have been charging to their cards. In fact, IU does not allow students to pay for tuition via credit card. According to Sallie Mae’s study, students estimated charging $2,200 on expenses such as textbooks, school supplies, food and clothing. In 2004, students estimated charging only $942.

The Credit CARD Act also includes provisions to limit the ubiquitous presence of credit-card companies on campus. The familiar sight of credit-card issuers offering T-shirts and iPods to students in exchange for signing up for a card will disappear. The Credit CARD Act disallows the exchange of free gifts on or near campus to lure college students to apply for a card, although companies can still set up tables on campus when permitted by the school. The law also aims to protect underage kids by banning the sale of their credit report to potential creditors, meaning those under 21 will no longer receive unsolicited, pre-screened credit-card offers.

Additionally, Congress is encouraging, but not requiring, colleges to offer credit card and debt education and counseling sessions as part of their new student orientation programs.

“I think that Congress should have taken the extra step and mandated financial literacy courses,” Kantrowitz said. “The problem is that nobody is teaching you how to manage your money, and it is the ideal time to teach students how to manage money.”

Big changes

— Consumers under 21 need a cosigner to open a card unless they have demonstrated proof of their financial independence.

— Retroactive rate increases, which are increases in the interest rate on existing card balances, are more restricted.

— Opt-in: Consumers must agree to fees that allow them to charge over their limit, instead of letting the company do it automatically.

— No interest rate increases the first year of your account.

— Additional fees, such as application fees, cannot total more than 25 percent of your credit limit the first year.

— Double cycle billing, in which the company charges interest over two billing cycles instead of only the current cycle, is prohibited.

— Bills are now due on the same day each month, with a payment cut-off time no earlier than 5 p.m. of that day.


Birth of credit reform

MAY 2008: The Federal Reserve Board announces new proposed credit rules to protect consumers from “unfair practices” and asks the public for comment.

AUG. 2008: 56,000 people respond to the Fed’s proposed rules, shattering the previous comment record of 45,000 in 2000. The respondents are overwhelmingly in favor of further restrictions.

DEC. 2008: The Fed approves a swath of new credit restrictions that limit interest rate hikes and over-the-limit fees, among other things.

APRIL 2009: Sallie Mae publishes its student credit study, noting major increases in student credit charges and debt.

MAY 2009: The Senate and House pass the Credit CARD Act and President Obama signs it into law. An earlier bill had similar but fewer restrictions and was abandoned.

AUG. 2009: The first phase of the Act goes into effect, requiring creditors to give consumers 45 days’ notice of significant changes in terms and allowing at least 21 days to make bill payments.

FEB. 22, 2010: The major changes of the Credit CARD Act take effect.


–Information from CreditCards.com, Sallie Mae and the Federal Reserve