Credit Card Use in College After the CARD Act

By Louis DeNicolaMay 1st, 2017Managing Credit and Debt

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If you were in college before 2010, you might have come across a now-cliché scene. A bank or credit union offering free t-shirts, Frisbees, pizza, or other relatively worthless (in retrospect) products in exchange for you taking out a new credit card. Unfortunately, credit cards and college students don’t always mix well.

The combination of being away from home for the first time, wanting to keep up or show off with friends, and having access to a credit line — without experience managing credit — leads some students to overspend. As a result, they wind up graduating with high-interest credit card debt (sometimes in addition to student loan debt), and potentially hurt their credit score along the way.

While the temptation to spend may still be present today, changes in the law have affected how credit card issuers can market to college students and when they can approve a student’s application. These changes have brought about positive developments in the college credit landscape, though the need for increased financial literacy remains.

The CARD Act makes it more difficult to market credit cards to college students

In February 2010, the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 went into effect. The CARD Act changed how credit card issuers can target college students and altered the requirements to approve a credit card application from someone who’s under 21. Based on this new law:

• Credit card issuers can’t offer tangible items to students to entice them to sign up for a credit card on campus, near the campus, or at school-sponsored events. In other words, you won’t see a bank tabling on the school’s quad and offering free t-shirts or slices of pizza.
• To qualify for a credit card, students who are under 21 must either have a co-signer, such as a parent or a guardian, or have an independent source of income.
• Card issuers can’t offer students who are under 21 pre-screened offers for credit cards without the student’s consent.

The Consumer Financial Protection Bureau found that following the enactment of the CARD Act, the total number of college credit card accounts declined each year from 2009 to 2015. The number of new college credit card accounts declined at first, increased between 2011 and 2014, and then dropped again in 2015.

But college students still get offers for credit cards

Jim Hawkins, an associate professor of law at the University of Houston Law Center, published an assessment of the CARD Act’s effectiveness in 2012. We got in touch with him for this piece and asked if he could update us on the effects of the CARD Act and his advice for college students who have a credit card.

Hawkins points to how card issuers can comply with the letter of the law, but perhaps not with its intent. For example, “issuers can offer free food and t-shirts 1,001 feet from campuses, so students still have to be on the lookout,” says Hawkins. Or issuers can give tangible gifts to credit card applicants at local off-campus hangouts. He also says that issuers can still market cards to students on campus without offering them a “tangible gift.”

The income requirement to qualify for a card on your own could be difficult to meet unless you have a part-time or full-time job. But according to Hawkins, “students only have to show they can make the minimum monthly payments, not repay the entire debt.”

In some cases, students can list their student loans or money from relatives as an income source in order to get a card.

Affinity Cards

Colleges and universities continue to work with credit card companies to promote student credit cards and offer affinity cards — such as a credit card with the school’s logo on it. However, the schools must publically disclose the agreements. Hawkins says the schools may receive payment from the issuer each time a new card is opened or when students use their cards.

The CFPB reports states that, “publicly available agreements show many students face high fees when using college-sponsored banking products.” With that in mind, you may want to compare all your options, not just the one’s your school recommends or promotes on campus, if you’re considering opening a student credit card account.

Here’s how college students are using credit cards today

While overall the number of college credit card accounts is down, there are still several major issuers that offer student credit cards, and students with an income or a creditworthy cosigner may be able to get a card easily.

Access is therefore only part of the issue in helping students avoid high-interest debt and credit-harming behavior. Education and building healthy financial habits may be more the most important factors.

Sallie Mae, a for-profit student loan originator, servicer, and collector, worked with Ipsos, a global market research firm, to study 18- to 24-year-old college students. The resulting report, Majoring in Money: How American College Students Manage Their Finances, gives a few insights into how college students use credit cards today.

• 56 percent of college students have at least one credit card and most of those without a card plan on getting one in the future.
• Of those who have cards, 59 percent of college students get a credit card to start building their credit history.
• Most college students (73 percent) pay the bill themselves, and the majority (63 percent) say they pay their bill in full each month.
• Students with a credit card are more likely to pay their bills on time (83 percent versus 69 percent of those without a credit card).
• Overall, 49 percent have viewed at least one of their credit reports, and the likelihood increases as the students age.
• Less than a third of students correctly answered three questions about how credit works, such as how interest accrues and how payment terms or behavior could impact their finances.

In 2016, Equifax, the national consumer credit bureau, also studied how college students use credit cards and their knowledge of credit scores. Its findings are a little different than those of the above study, but they seem to show similar trends:

• Almost 70 percent of students have one or more credit card.
• 72 percent say they pay off their credit card balance in full each month.
• 18 percent say their parents pay the credit card bill.
• Most of those who don’t pay their bill in full each month plan on paying off their balance within a year.
• 43 percent had checked their credit scores.

The Equifax surveyors also asked questions to see if college students understand what does, and doesn’t impact one’s credit score. The majority of students correctly pointed to key data points, including paying bills on time, the types of credit cards and loans one has, and the amount owed on credits cards and loans. However, some students also mistakenly thought being denied credit or participating in credit counseling could impact their scores.

Make the most of your student credit card, but be careful about overspending

Having and using a credit card isn’t inherently bad. Rewards programs can save you money or help you travel for free, credit cards may offer more consumer protections than debit cards, and building your credit early can be a useful strategy. A strong credit history can improve your chances of getting approved for a loan with a low interest rate and may help you when you go to rent a home or apply for a job.

One of the keys to using a credit card to build your credit, and avoid paying interest, is to treat the card as if it’s a debit card. Only use it for purchases if you have the money to pay your bill in full and always pay your bill on time (even if you can only afford the minimum payment at times).

But it’s easier to read this idea than put it into practice. “There are studies that show people literally spend more at fast-food restaurants if they pay with cards,” Hawkins says. “The big risk with credit cards for students, in my mind, is that it is just so easy to spend money.”