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Effect of CARD Act on Students
By Alexander Carl on March 22, 2010

60945_6877-(1).jpgCredit card reform has been long in coming, and given lenders’ nearly free reign to manipulate rates, any form of cardholder protection is wonderful.

Now we have the 2009 Credit CARD Act, clamping down on predatory practices that keep some debtors continually in the red.
Sounds like a big boost for college students, who often use credit as a means of staying afloat through school. Right?

Perhaps. Let’s start with some reforms that have relatively minor impacts:

New interest rates for only new balances. This means penalizing rates will only take effect after a slip-up (no retroactive rates), and only on the accounts in which it occurred. While this is extraordinary help for spenders chronically in debt, most students have only started building credit, and have little “past” to worry about.

Principal payments are first applied to the debt with highest interest rate. Another godsend for overburdened debtors, this also can benefit students, especially if you’re coming off of a promo rate or using interest-heavy cash advances.

45 days notice before rate changes. Although staying informed is beneficial to everyone, this has little direct help for student’s finances— unless you’ve accumulated so much debt in school that you must to pay it all off before a hike. (See Credit CARD Act--Rate Change Notice)

Freezing accounts at the credit limit. It’s always great to avoid penalties, but this should not be an issue for anyone if they’re mindful of how much they spend.

But the big reform overshadowing all others:

Anyone under 21 must have a co-signer to open an account. The only exception is if a student can prove that they have a job and the fiscal ability to pay their credit card bill.

Is this help or hindrance for students?

In one sense, it selects only the most “responsible” (gainfully employed) to have the benefit of plastic. This should cut down on debt racked up by students apparently auditioning for Credit Gone Wild.

Yet it also keeps students from building good credit through small, responsible purchases if they don’t have a qualifying job. And if they can’t get a co-signer, their credit days are put on delay.

Underlying message: the CARD reforms don’t change the game, but make it pay more to spend responsibly.
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