New rules from Washington will make it much tougher to get a credit card if you’re under 21.
Under the recently passed Credit Card Reform Act, legislators are taking square aim at financial services companies who dole out credit cards to younger consumers. The initiative comes after years of consumer advocacy complaints against card companies blanketing college campuses with offers of “easy access” credit cards.
The new legislation does put an end to the marketing assault on college kids by credit card companies. No question, recent data on college students and credit card debt isn’t pretty. According to a study by the University of Wisconsin-Madison, the average college student has $2,500 to $3,000 in credit card debt by the time they graduate. The consumer advocacy group Campus Progress, pegs the number even higher - at $4,100 - a 41% hike since 2004, the group reports.
On the other hand, if under-21s can’t get a credit card, they can’t get credit. Lenders are loathe to lend to individuals with no credit history.
The new rule stipulates that, to get a credit card, 21-and-under consumers will have to get a financially reputable co-signer (usually a parent) to co-sign on the dotted line. Or, younger consumers can make a case to the card company that they are financially stable enough to pay off debt incurred on a new credit card.
Are there any ways around the new rule? Yes, there are. The language in the actual legislation is vague, saying that it prohibit lenders from offering credit cards to consumers under 21 unless a parent or guardian accepts responsibility for the debt or the individual can prove they have the means to pay it back.
That leaves potential credit card owners some wiggle room – it might be harder to get a credit card for consumers aged 21-and-under, but it is by no means impossible. Here are some options:
Get a co-signer. Parents may not be thrilled about adding their name to your card application, but studies show the longer you have a credit history, the higher your credit rating. The argument young consumers should use is this: getting a credit card with your parents actually helps you with your credit – but only if you pay your bills. To cover all the bases, use this “credit card contract” prepared by Dr. John E. Whitcomb, author of the book Capitate Your Kids. It spells out the responsibilities between parents and kids in a cosigned card agreement.
Get a pre-paid credit card. Card companies like American Express have begun offering prepaid credit cards for teenagers. Parents pay the card carrier in advance (as collateral) and get a record of how the money is being spent. Once the money runs out, it’s up to the parents to put more money into the prepaid card account.
Prove you can pay the money back. As stated above, there is some vague language in the new credit card reform legislation, including a passage that says under-21s may qualify for a credit card if they can “prove” they can pay the money back. So if you have a good job, have paid your bills, and can prove you’re a good credit risk, you can still apply for a credit card and have it approved. Be prepared to show pay stubs, bank account records – even tax returns – to prove you can pay your bills. You’ll likely undergo a credit check, too.
The new credit card rules are pretty much aimed at protecting college students from overly-aggressive card issuers. But in the process, the new law makes it much more difficult for young Americans to get a credit card.
But all the avenues aren’t blocked. Use the tips above to qualify for your card – and make sure to pay your bill.
If not, you won’t have your card long – and you’ll be back to square one and that much poorer, credit-wise.
—For a comprehensive credit report, visit the manybanking.com Credit Center.
—For more ways to save, spend, invest and borrow, visit MainStreet.com.