CARD Act fails to protect students

A new study indicates that limits on how credit cards can be marketed and approved for those under 21 aren't working as planned.

By Karen Datko Jan 13, 2011 1:34PM

This post comes from Scott Gamm at partner site MainStreet.

The epic Credit CARD Act, which took effect last February, aimed to reform the entire credit card industry as well as protect students from the questionable marketing practices of most credit card companies.

Unfortunately, it doesn't seem to have worked.

The new law states that anyone under 21 must have a co-signer on a credit card account unless they can prove adequate income to pay down any possible accumulated debt.

Also, credit card companies cannot offer incentives like free lunches or T-shirts to entice students to sign up for their cards. And the marketing tents and booths that credit card companies typically set up on college campuses must be kept at least 1,000 feet away from campus.

College students also used to be swamped with preapproved credit card offers in the mail, but the CARD Act now prohibits credit card companies from sending these offers to those younger than 21.

While these provisions from the CARD Act sound helpful, it would be nice if they actually worked.

Results from a new study by Jim Hawkins at the University of Houston reveal some worrisome conclusions about the effectiveness of the CARD Act as it relates to students.

First, 76% of students under 21 who participated in the survey said they had received credit card offers since the start of last year.

Debt begets debt

Also, 29% of students under 21 who received a credit card during the beginning of the school year included student loan money as part of their income when applying for a credit card.

The fact that some credit card issuers considered money that is supposed to be used for paying tuition as actual income raises concerns about the tactics credit card issuers use to gain new student customers.

In 2009, credit card companies spent more than $83 million (.pdf file) to market and promote student credit cards, according to the Federal Reserve. As a result of these marketing efforts, credit card issuers gained an additional 53,000-plus student credit card accounts.

The problem with this is that students are being taught to view credit cards as a way to extend their spending habits when they should view credit cards as a way to build good credit history.

Find a better credit card

A tip for students: Beware of applying for a credit card from an offer you receive in the mail. These cards are usually littered with hidden fees and high interest rates. Visit BankingMyWay to research the best credit card (one with low fees and interest rates) for you or consider turning to your school's credit union. And remember that you shouldn't need more than one credit card.

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