Great post, Jeremy. I agree that there are debatable pros and cons regarding the new credit card law, but at the end of the day, I think that we can all agree that the new rules give parents a real opportunity to talk with their teens about money, including how and when to use credit cards. Study after study shows that parents have the power to shape the way their children think about using money. Understanding how money works at a young age can help build a foundation for future financial security. This opportunity offers an ideal time to connect with kids and explain the advantages and disadvantages of credit cards.
Good or Bad, The New Law Makes it Harder for Teens to Obtain Credit
You may recall that back in May of 2009 the President signed into law the Credit Card Accountability, Responsibility and Disclosure Act of 2009, or CARD. This act was packed with all sorts of new credit card rules and regulations that would hopefully lead to more responsible borrowing. While this was big news back when it was introduced in May, it has somewhat fallen off the radar even though it’s scheduled to take effect on February 22nd.
One of the highlights of the new law has to do with teens and credit cards. We’ve known that over the years college students have been prime targets for credit card companies. They would flood college campuses during the first few weeks of school and run all sorts of promotions and give away freebies in order to get kids to sign up for credit cards. While this may not seem like that big of a deal, a lot of these young people soon received cards in the mail and were granted credit limits of a few thousand dollars. Unfortunately, without a steady source of income and understanding the consequences of racking up a credit card balance these students soon found themselves in trouble as they had minimum payments coming due.
Get a Job or a Co-Signer
In the past the only requirement to qualify for a credit card was to be at least 18 years old and to have a heartbeat. Credit card companies would give a card to just about anyone. Today, lending has already tightened up, but it’s going to get even worse (or better?) for teenagers. When the new laws take effect you will need to be at least 21 years old to get a credit card without a co-signer or verifiable income. Teens will still be able to apply for a credit card once they turn 18, but to qualify they will need to either have their parents or guardian co-sign or have a job earning enough income to qualify for a card. Sorry, kids. Looks like the days of accepting every credit card offer that comes through your dorm room mailbox and having the best spring break ever are over.
Good News / Bad News for Parents
The new credit card law is a mixed bag for parents. First, the bad news. Your teen’s credit problems now become your problem. In the past if your teenager got a credit card and racked up an unpayable balance there was no legal obligation for the parents to step in and help out. Not any more. Now that you’ll have to co-sign your teen’s card you’re on the hook for their mistakes. This could be as benign as having to help them out with payments if they can’t afford them to actually having your credit destroyed if they get into serious trouble, make late payments, default, etc.
There’s also some good news. You now have a little bit of control over your teen’s spending and you don’t have to worry as much about whether or not they are racking up thousands in debt that you don’t know about while they are away at college. Now you can make sure they only have a credit card with a low interest rate, an appropriate credit limit, and keep tabs on how much they spend and their ability to pay the bill each month. Parents should use this as a teaching moment to help their teens learn how credit cards work, the importance of establishing credit, and making those payments on time.
Good News / Bad News for Teens
Even though most teens won’t like it, there is a lot of good that will come from these changes. It will now be a lot harder for teens to carelessly rack up substantial debt and ruin their credit at such an early age. I know firsthand how easy it is to get into credit card trouble while in college. Been there and done that! So, now that you’ll need a job that pays enough to afford credit card payments or put your parents on the card with you it’s far less likely that major credit card problems will arise.
That being said, it’s not all good. If a teen’s parents already have bad credit it might be impossible for them to even qualify for a credit card they can co-sign on. That could mean they are out of luck until they turn 21. Most credit card opponents would say this is still good news. But let’s not forget reality. You need to establish a credit history at some point as it plays a very important role in your life. From getting a mortgage, a car, getting a job, or even renting an apartment, your credit score can make or break you. If you can’t get a credit card until you’re 21 that means you have lost three years of potential credit history. As a 21 year old is graduating college and getting ready to set out on their new life it can be that much harder if you’re trying to also establish credit for the first time.
Strategies for Teens and Parents
If you’re under 21 and currently don’t have a credit card but have been thinking about getting one, you may want to apply for a good 0% rewards card before the February deadline. No, this doesn’t mean all teenagers should rush out and just start applying for credit. But, if you were already thinking about getting a card, be it for emergencies or just to establish some credit history, it might make sense to get one before the new restrictions take effect. If you are thinking about getting a card you should treat it as if the new restrictions were already in effect. Talk to your parents about it and let them know you’re going to get a credit card. They can help you make the right decision and share some wisdom so that you can avoid the mistakes they may have made.
Parents, it’s also time for you to start thinking about how these changes will affect you and your teen. If you already have a teenager or have children that will be turning 18 in the coming years, you better be prepared for them to start asking you about credit cards. Decide what your policy regarding credit cards will be and determine how you’re going to teach your kids how to use them responsibly so that you don’t end up in credit trouble yourself. And while you’re thinking about that, you should probably check your credit score and make sure your credit is good enough that you can help your kids out when the time does come. Have credit trouble? Here are some tips to help you improve your credit score.
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.
I found it great to get a credit card early so I could start building up my credit score. I saw the abuse of credit cards with some of my friends, leaving them with debt once they got out of college. I can see why something like this has come along.
I wonder how this will affect me? I'll be 21 in March, but I have had 2 credit cards since I was 19.
I think it's odd that it's "verifiable income" or parents co-signing is the requirement until age 21. Good business practice would call for "verifiable income/resources" at any age, making this entire disucssion moot.
In a few years, we'll end up seeing all the debt from "just graduated from college, need all the new stuff to furnish my own place and socialize". It seems the circle of debt starts when financial independence is gained, no matter what the age. Usually it's college, because that's the first time many leave home, and upon getting a credit card, feel the freedom of ability to do what they want. The law is just moving this age of feeling financial freedom until after graduation...or senior year.
When I got my first credit card (at 26 years of age), I had to list my income on the application and my employer. I'm not too familiar with the college student/credit card situation, but don't the applications the students fill out also require income & employer info being submitted? I agree that kids & parents are responsible for their own financial actions, but what are the banks thinking when they give out unsecured credit cards with access to hundreds or thousands of dollars to teens/20 somethings with no verifiable income?
I agree, Jen. That's the problem you have when the government tries to protect people from themselves. You may help a lot of people avoid making a big mistake, but you're going to end up punishing a lot of the responsible people in the process.
There are just as many people in their 20s, 30s, and beyond that got into just as bad of a debt situation without it being a result of getting a card at 18. Seems like they could have done a better job of regulating who the credit card companies market to and how they do it rather than lump all 18-20 year olds into the same category.
Oh well, it will be interesting to see what kind of effect these changes will have going forward.
I have mixed feelings about this. I do think the marketing credit card companies aimed at college students was over-the-top, but in the end it's really the kids' and parents' fault. I think it goes back to the lack of education about money and finance.
When I started college my mom told me to get a credit card. The billing address was my home, not my dorm, and I was to put books and tickets home on the card. Mom would get the bill and pay it. She had me do this both for convenience AND so I could start building a credit history. Having a card so early never became a problem, in large part because my family showed me how to manage money and explained why racking up credit card debt is bad.
But, it also probably helped that when I was in college McDonald's and pizza delivery guys didn't take plastic...
When I was in Toronto, I was unable to get a cell phone without a credit card.
My bank allowed me to get a $500 limit credit card, provided that it was secured. Essentially, they took $600 out of my checking account, and put it into some investment account that had my name on it, but I wasn't able withdraw from - to secure the card.
I thought this was a fair solution to the problem of not having credit history, this being my first credit card.
While $500 was much more than what I needed, it was a $14/month cell plan, I think this was a good limit, as a college student. The only time $500 cut it close, was in the beginning of the semesters when I bought textbooks.
Prior to having the credit card, all my purchases were done with a debit card, so I never paid attention to my monthly expenses. Using the credit card forced me to look at the bill once a month.
When I came back to the US, I was disappointed that none of the banks would offer me a similar solution, so it took a while until I got approved for a credit card. When I finally did, it was pretty absurd that I got approved for a 10k card, while earning minimum wage part-time.
@Craig: Actually, the kids in college should be dramatically effected, since they won't be able to get the card without Mom or Dad's blessing (and financial backing). (Since many college kids are under 21 and lack significant income).
Personally, I'm curious to see how the banks find the loopholes. There always seem to be loopholes. . .
I think it's a smart idea to place more restrictions on credit cards for teenagers until they can learn how to manage their finances or have a parent who is willing to help them learn. While I was growing up, it was a must that I either had to have a job or have an adequate amount of money before my parents would allow me to have a credit card or any card that involved money because while they wanted me to have a credit card and experience what it was like to have a credit card, they also said that I must be responsible for my credit card.
This is smart although I don't think as many teens get credit cards, it's more the college kids who need stricter laws.