August 27, 2009

The major changes happened to the credit card industry not to long ago and they take effect the beginning of next year.  That is right if you can’t drink you can’t get a credit card.  Well it is not a 100% true but it is close.  You will just have to ask Mom to buy the beer with her card.

The new credit card laws state that individual under the age of 21 cannot get a credit card without a cosigner or if they can prove they have sufficient income to support having a credit card.  Also, the credit limit on any given credit line can be no larger than $500.  And the total amount of credit available via credit cards cannot exceed 30% of the individual annual income.  Furthermore, credit card companies are no longer allowed to promote on campus.

Why the changes to credit cards?

The answer college students were leaving college with debt and most times this was in excess of $2,000.  This is not a way to enter the real world.  Furthermore, credit card companies were explicitly targeting campus to get new card holders.  Since your first credit card is the one you usually hold onto for the longest period of time, college students are the perfect target.  Also, signups were easy.  It many times took the offering of a tee shirt to get someone to sign up for a credit card.

The truth is that many of these individuals were not ready to manage a credit card.  They need a couple years on thier own before they could realize what it takes to manage credit.

Why the cosigner?

The answer is pretty simple. Since the co signer is more than likely Mom or Dad, there is more accountability to the debt. Even the idea of asking Mom or Dad to co sign for a credit card could be difficult. Parents already know the possible credit pitfalls and won’t want thier children to fall into them. Also, the co signer is responsible for the debt if the card holder does not pay it off. So there is a financial interest by the parents to ensure the credit card is effectively managed.

The idea of using credit card is not a terrible one for individuals under 21. This a world based in credit and these low limits will let individuals learn while not falling into a huge amount of debt.