A 2009 study by Sallie Mae, the nation's leading provider of student loans, concluded that students use credit cards to live beyond their means. Similarly, notorious college credit card marketing strategies have been well documented for years. New federal guidance involving student credit cards stands to tackle these issues.
Can you touch on highlights of the new CARD Act as the regulations apply to students?
Regulations refer to students under 21 years old with the purpose of limiting extension of credit that exceeds ability to repay. Essentially, it levels the playing field for adults under 21 who are not enrolled in college. It requires proof of income that can support a specific line of credit, otherwise an adult/parent/guardian is required to co-sign.
How will the new bill affect students enrolling in the fall?
It will lower credit limits and there will be more co-signed contracts with parents. Students will receive more external marketing--especially email and iPhones--although subcontract marketers will push the boundaries of acceptable marketing practices on campus.
But banks want to reduce risk and lines of credit anyway, so some of these changes would have occurred regardless, although the student market is the most desirable. Hopefully, greater media attention to personal finance and debt will lead to more interest in personal awareness and skill development. The RDR "Financial Fitness" score will be an especially important learning tool--along with budgeting--since means-testing debt/credit capacity is the defining feature of this regulatory reform.
Do you have any tips to help students navigate this new scenario?
- Create a budget and distinguish expenditures between "needs," "wants," and "desires." Identify which are paid by cash and which are paid by card.
- Identify low-cost purchases that are not recorded in your budget and estimate cost per month and year.
- Identify a limit to how much a credit card allows you to spend more than you should.
- Set financial goals in college and earn the "right" to spend for specific purchases.
A key factor for students to be aware of are the competitive consumption pressures on college campuses. Don't pursue a lifestyle of those with resources that you do not have. Financial health is intimately connected to physical, emotional, and professional health. Credit card debt is one problem that can be limited and controlled!
Is there anything you would like to add?
In a tight job market, good credit and financial management skills will be ever more important in personal and professional life after college. Rebel from the values of your parents' generation and spend prudently while maintaining your personal freedom from debt.
As students start returning to campus in the weeks to come, I think Dr. Manning's advice should be heeded. The importance of establishing responsible credit habits while in college can not be overstated.
About the Author
Mike Killian is founder of Learning Credit and Debt Management. Mike has been writing about credit and debt management issues that are of importance to consumers for over 8 years. His articles have been referenced by various members of the media, including MSNBC and The Motley Fool. Mike has also offered debt elimination seminars to businesses and community colleges for many years.