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photo: GETTY IMAGES (Credit cards)
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The New rules of college credit
By AnnaMaria Andrioti A law that took effect this year cracks down on high-interest credit cards and aggressive marketing tactics used by card issuers to sign up college students. But it won’t stop banks from trying to win students as customers.
After all, it’s a lucrative market. According to a 2009 study by Sallie Mae, 84% of undergraduates have at least one credit card, up from 76% in 2004. And 82% of college students carry balances—mean balances stand at a record $3,173—and incur finance charges each month. And seniors graduate with more than $4,100 in credit-card debt on average, up from around $2,900 in 2004. “Credit-card issuers are still going to make credit available to college students because they are some of the best candidates for credit,” says Ruth Susswein, a deputy director at Consumer Action, a consumer advocate organization. College students generate profits for credit-card companies by not paying their balances in full. And in the long term, they tend to hold on to their first credit card for life, she says. So banks are trying varied marketing strategies to get their cards into students’ wallets. Here’s what college students can expect in terms of marketing and underwriting standards under the new law: FREEBIES It’s a common sight on a college campus: a credit-card table, where bank representatives take applications from students and offer them free gifts. The Credit Card Accountability, Responsibility and Disclosure Act prohibits credit-card issuers from giving out free stuff to students in exchange for filling out a credit-card application on college campuses, at college-sponsored events, or within 1,000 feet of them. But the new law leaves a huge loophole: Card issuers can still set up tables and give out freebies, as long as they don’t require students to sign up for a credit card on the spot. That means that credit-card companies can give away gifts and promote their brands on campus, says Ms. Susswein. At least two major issuers—Citigroup and Bank of America—say they won’t. “As a matter of policy, Citi has not marketed student credit-card products to young adults on or near college campuses in over two years,” says Citi spokesman Samuel Wang. And Bank of America spokeswoman Betty Riess says the bank is “not conducting campus tabling events to market credit cards to students.” PARENTS Some credit-card issuers are aiming their pitches at students’ parents. Discover is mailing credit-card marketing materials directly to parents’ homes, says spokesman Matthew Towson. “We currently acquire most student accounts through direct mail and the Internet,” he says. And Wells Fargo is considering marketing its college-student credit cards through parents who are existing customers. “We may be looking at that now and do that in the future,” says Dinna Martinez, a product manager of student credit cards at Wells Fargo. FINANCIAL LITERACY The CARD Act recommends that colleges provide education about credit cards and debt during student orientation. But credit-card companies may also use their own financial-literacy programs to promote their cards. For example, when college students sign up for their first credit card with Wells Fargo, they can take an online quiz on credit management and in turn receive a reward, such as a free INCOME VERIFICATION AND COSIGNERS To get approved for a credit card, students under 21 will need to show proof that they can repay their debt, or they’ll need a cosigner (who is at least age 21). A cosigner is someone who agrees to accept responsibility for debts that the borrower can’t repay. If a student goes at it alone, he would have to provide the credit-card issuer with information about his wages (like pay stubs), brokerage statements showing interest income from investments, or bank-account statements showing adequate savings, in order to qualify for a credit card. Exact terms will vary by company. Discover’s Mr. Towson says that full-time students under age 21 will need to show verifiable income that’s above $2,000 a year and must have “an acceptable debt-to-income ratio” to qualify for the Discover Student card. When students use a cosigner who isn’t a full-time student, the cosigner will need to earn at least $15,000 a year to be considered for a Discover card. As of now, American Express doesn’t have plans to offer a cosigning option, says spokeswoman Desiree Fish. However, students who are under 21 but over 18 who can’t get an American Express card on their own can have an existing AmEx user add them to their account. Cosigning on Capital One cards, meanwhile, remains in question. Spokeswoman Pam Girardo says the bank historically hasn’t used cosigners extensively but that it’s exploring its options. “[We] continue to look for consumers who have the means to independently pay,” she says.
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