Credit Card Reform Swipes Easy Plastic from College Students

Back when dinosaurs roamed the Earth, you actually had to have a job to get a credit card.

All that changed in recent years, when credit card companies determined that issuing credit cards to college students was a great way to nurture long-term brand loyalty. Many resorted to aggressive marketing tactics, offering everything from T-shirts to iPods to students who signed up.

Not surprisingly, some students ran up charges they couldn't repay, triggering interest rate increases and late fees. Because credit was so easy to get, "A lot of kids got themselves in trouble," says Adam Levin, founder of Credit.com, a consumer website.

Soon, though, credit won't be so easy to get. Last week, President Obama signed legislation that restricts a number of controversial credit card practices, including issuing credit cards to college students. The law prohibits lenders from issuing credit cards to individuals younger than 21 unless they can prove they can make payments or get a parent or guardian to co-sign.

Because most college students don't have much money, the upshot is that most won't be able to get a credit card without permission from their parents. The bill also requires lenders to get permission from the co-signer before increasing the card's credit limit.

Students who fall behind on their credit card bills often leave college with blemished credit reports, which makes it more difficult for them to rent an apartment, get a car loan or even find a job.

"This is a mess that stays with you for a long time," Levin says. "As much as students are obsessed with GPAs, your credit score is the most important number you're going to have to deal with" after graduation, he says.

Eighty-four percent of undergraduates had a credit card last year, according to a study by student lender Sallie Mae. The average senior graduated with a balance of more than $4,100, up from about $2,900 in 2004.

Even more troubling, only 17% of students surveyed said they regularly paid off their monthly balances, and 60% said they were surprised at the size of their balances.

The Sallie Mae survey also found that a third of students had never or rarely discussed credit cards with their parents. These students were the most likely to be surprised at the size of their balances when they received their credit card bills.

Parents who co-sign for a child's credit card will be on the hook for any charges the child can't pay. But in the past, many parents have ended up paying their child's credit card bills anyway, "because they don't want Junior to have a terrible credit score," says Bill Hardekopf, chief executive of LowCards.com.

"If Junior has to come to Mom and Dad and say, 'Will you co-sign?' then Mom and Dad can have a talk with Junior about credit cards," Hardekopf says.

Hardekopf says he co-signed a credit card with a very low limit for each of his three children while they were still in high school. Every month, he sat down with them and reviewed the bills. Two of his children have since graduated from college, he says, "And they have a much higher credit score than their friends."

Without credit, students could be at risk

Karen Gross, president of Southern Vermont College in Bennington, Vt., says the legislation will address some of the more egregious credit card industry practices, but she worries that it could have unintended consequences for low-income students. Many of these students rely on credit cards to pay for expenses that aren't covered by financial aid, she says.

If their parents won't co-sign a credit card, Gross says, these students may turn to even more costly sources of loans, such as payday lenders.

Gross says she'd like to see banks develop a credit card specifically for college students that would have a low credit limit and an even lower spending cap.

For example, Gross says, the card could have a $600 limit and a $250 spending cap. The card "would help students learn to use credit responsibly in ways that would maximize their credit score," Gross says.

In the meantime, supporters of the credit card bill hope it will usher in a new era of financial literacy for college students and their families.

"Even though credit is an individual exercise, when you're a member of a family, it's like a team sport," Levin says.

"We all have a stake in making sure our children start the right way and understand as best they can the system and the way it works."

By Sandra Block, USA TODAY