New federal legislation designed to protect consumers from predatory lending practices is going to make it more difficult for college-aged people to get credit cards.
Beginning February 2010, the Credit Card Accountability, Responsibility, and Disclosure Act will require people under the age of 21 to provide proof of income and have a cosigner to get a credit card.
Stephen Ciccone, associate professor of finance at UNH, believes that the income requirement will stop at least half of college students from applying. He also said the legislation comes in an already difficult credit climate.
“Even those in good credit standing are having their limits slashed,” said Ciccone. “Banks are far less willing to lend, whether it is because they are uncertain about borrowers’ ability to repay them or [are] short on cash.”
Ciccone and William Johnson, Ciccone’s colleague and associate professor of finance, both agree that this legislation will be helpful in protecting irresponsible borrowers.
“Interest rates won’t skyrocket out of nowhere,” said Ciccone. “The law won’t make a big difference to those who use or would use their credit cards wisely. Young people are sometimes more responsible than older people with their credit cards. Credit card companies love people with large balances who only pay the minimum every month. They make a lot of money through interest.”
The best piece of advice Ciccone could give young credit users is to pay off their balance in full every month, while Johnson advises young credit holders to maintain responsibility for their debt.
“Interest rates have skyrocketed in the past few months. You should use a credit card for convenience only if you don’t want to carry cash,” Johnson said.
For those who would prefer to stay away from credit cards, Tampa-based financial services provider nFinanSe offers a prepaid card, which, according to the company’s Vice President Clare Morgan, says functions like a credit card. But, since the amount of money put on the card is limited, the owner cannot accrue debt.
Morgan says the card is available for free and costs $2.95 per month to use. The card can be used for ATM withdrawal, bill payment online, as well as a debit and credit substitute at retail locations. Direct deposit can even be set up since nFinanSe prepaid accounts have a routing number just like a regular bank account. Customer service and transactions are free and calls are even answered by a live person.
“Many of us have credit cards and like the instant gratification,” Morgan said. “Students have increased expenses, but at the same time they want to have fun. Many are dropping out because they can’t afford school or finishing in significant debt.”
Morgan says nFinanSe’s prepaid cards help to control spending and promote financial responsibility since the card is impossible to overdraft. Morgan thinks it is a great budget tool, especially for college students, especially since she acknowledges that it is difficult to find a cosigner in today’s tough economic times.
Morgan said she thinks the rules of credit are going to change and be about more practical financing. She thinks the upcoming generation is going to be more cash-based than the current generation. However, there are things which cannot be paid for in cash because they are online, such as bills and eBay purchases. nFinanSe and Morgan dub it the “plastic gap.”
“Many don’t want them to use their credit card online,” Morgan said. “My son, for example, uses his for online gaming and iTunes, which have a credit card attached to them. We call it a walking bank account.”
The company also has a number of helpful hints online for best credit practices for college students. Tips include avoiding buying used textbooks, sticking to the college meal plan instead of eating out, and using student IDs for discounts. Morgan said the best advice she could give to young people is not to buy anything on credit which will be used immediately, like dinner or Friday night drinks.
“You’ve already consumed what you bought and will be paying for it later plus interest. Buy big ticket items on credit which will have value down the road,” Morgan said.
