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Among the less heralded features of the new federal law regulating credit cards are the law’s restrictions on consumers under age 21.
Under the new rules:
- Lenders may not send pre-screened credit offers to this age group.
- Younger credit card applicants must provide either a credit-worthy co-signer or evidence of income. Credit card companies must obtain written authorization from all co-signers before raising credit limits.
- Young applicants without income or co-signers can complete a Treasury Department-approved financial literacy course. To make the government list, the course must have a track record in producing changed consumer behavior. As of today, there are no such courses.
- Colleges and universities cannot issue their affinity cards to anyone under the age of 21.
These provisions, however, may be over-rated. Most cards already require that applicants claim they have the means to repay. But in effect these cards can duplicate the liar loans that helped bring down the mortgage industry: Neither the law nor most credit card issuers require proof of income. Nor is a financial literacy course a substitute for adequate income.
The ban on pre-screened credit offers doesn’t offer much protection either. A young credit card applicant can still respond to one of the many credit card advertisements targeting them on a wide variety of media, including the Internet, television, and at live sporting events and concerts.
Similarly, the decision to go after affinity cards is probably more symbolic than real. Universities will not be prevented from selling their student lists to credit card companies, providing credit card applications with every bookstore purchase, or encouraging students to sign on with a credit card company that makes donations to the school.
The Congressional Budget Office estimates that the cost of enforcing the entire credit card law will be approximately $2.5 billion over the next four years. But even the CBO doubts the effectiveness of the rules governing young consumers. In its report on the bill, the CBO states that it “is uncertain whether the mandates would affect the number of persons under 21 who would acquire credit cards.”
To learn more about credit cards and how to manage your credit effectively, order How to Use Credit Wisely for $10 from the AIER Online Bookstore.
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