Credit Cards for Students... a thing of the past?

For years, college students have been rocked by credit card debt after being victimized by what can be considered a system that’s no less vicious that the predatory mortgage lending practices that have dominated the news in the past year. That’s the first thing that came to mind when I asked Jordan Goodman, America’s Money Answers Man, about the biggest money mistakes college students make.

“Getting into credit card debt over their head,” he says. “The average freshman has about five credit cards and $2,000 worth of debt by the end of their freshman year. By senior year many have as many as seven credit cards and $10,000 in credit card debt. But that’s going to change.”

Jordan points to the new Credit Card Reform Act signed into law in June by President Obama. The Senate voted 90-5 and the House 361-64, to pass this new legislation that includes banning credit cards for people under the age of 21 unless their parents or another adult co-signs for them or they can show proof of their ability to repay the debt. Although this part of the legislation doesn’t kick in until February 2010, college students will also have to get permission from parents or guardians to increase credit limits.

(Note to self… who are those 69 elected officials who didn’t vote for this? Should I be voting for them? Anyway… back to the matter at hand!)

THE PREDATORS…

What’s the reason for this new legislation? Abuse by the credit card companies, according to Jordan. “They were offering credit cards at places students spend money anyway, like at football and basketball games. Sign on the dotted line, no questions asked, you get a free t-shirt and a cap and you can walk out of there with a credit card.

“The credit card companies knew students didn’t have income or much income, but hoped that if they fell behind, the parent would make up the difference. Sometime parents did and sometimes they didn’t. That’s where people got into real trouble, because you’d have these debts piling up with no income to pay them back. It caused a lot a grief for the parents as well.”

But Jordan says the credit card companies aren’t the only ones to point the finger at. Many colleges and universities share in the blame in what he calls a “massive conflict of interest.”

“Many campuses were sponsoring these credit cards,” says Jordan. It would be a University of (insert your school name here) credit card. It was all about getting this credit card and being a loyal (insert team name here). It was positioned as supporting your school because every time you spend on that card the school would get a certain amount back as an incentive. The schools were promoting these cards to students, faculty, staff and alumni. It would have the school logo on it. So it wasn’t just a matter of irresponsible students, it was the schools forcing it on them in a sense.”

THE UNSCHOOLED…

The university-sponsored card isn’t necessarily a bad idea for staff, faculty and alumni, but for the uninitiated student free-flowing credit can be a one-way ticket to financial disaster.

“It’s their first time away from home so they’ve had no restrictions on them what-so-ever and this has gotten and awful lot of college students in an awful lot of trouble very quickly spending on pizzas, stereos, iPods and all kinds of things.

“I think it’s going to make it a lot harder for students because they are used to having free-flowing credit. A lot of parents are going to say ‘Get a debit card’ or ‘ Only spend what’s in your checking account’ or ‘We’ll pre-load a debit card with a set amount that we think that’s all you should be spending.’

The result says Jordan, “…a lot more discussion between parents and students. They’ve never had to have these conversations before because if the student wanted a credit card they’d just go ahead and do it. They’d go to a basketball game, come back with two credit cards and start spending right away. That’s very different from what’s going to be happening in the future.”

Jordan has spent 30-years as a reporter/writer/editor at MONEY Magazine and as the author of 12 highly-regarded personal-finance books. He now speaks at businesses, conventions and colleges around the country sharing PRACTICAL financial advice. I think I’ll follow his lead on this one. My advice… Put the credit card down and back away slowly!

PEACE.
Rick

MORE INFO…

S.392 – Credit Card Reform Act of 2009 – A bill to protect consumers, and especially young consumers, from skyrocketing credit card debt, unfair credit card practices, and deceptive credit offers.
Consumers Union has assembled a “Credit Card Care Package” with tips for students and their parents at www.CreditCardReform.org.