Building Credit Will Be More Difficult After the CARD Act of 2009

Credit CARD Act of 2009 and Teens Many of the provisions of the sweeping Credit Card Accountability Responsibility and Disclosure Act of 2009 (aka the “CARD Act”) will become effective starting on February 22, 2010. The CARD Act, signed into law by President Obama on May 22, 2009, includes a number of provisions that are designed to protect college students and young adults from aggressive credit card marketing.

But will the CARD Act have an unintended consequence of hurting young consumer’s ability to build credit? Like it or not, a good credit score is an important asset for working Americans.

The CARD Act includes the following safeguards for young adults:

  • Credit card issuers extending credit to young consumers under the age of 21 must obtain an application that contains: the signature of a parent, guardian, or other individual 21 years or older who will take responsibility for the debt; or proof that the applicant has an independent means of repaying any credit extended;
  • Prescreened offers of credit to young consumers are severely limited;
  • Increases in the credit limit on accounts where a parent, legal guardian, spouse or other individual is jointly liable are prohibited unless the individual who is jointly liable approves the increase; and
  • Issuers are generally prevented from aggressively marketing to students.

While these safeguards will likely achieve the objective of reducing the use and availability of credit cards by young Americans, they will also cut off one of the main ways that young consumers build a credit history. A credit history (and associated credit score) is established by demonstrating an ability to repay debts and obligations. Many expenses paid by young consumers do not get reported to the credit bureaus. For example, a college student who pays rent and utilities, but who does not have a credit card, will likely not establish a credit history, as most landlords and utilities do not report to the credit bureaus.

The CARD Act will help ensure that young Americans enter the workforce with lower amounts of credit card debt, but will it also cause them to enter the workforce without access to credit thanks to a lack of a credit history?

There are ways that young consumers can still establish a credit history (and avoid the problems of excess credit card debt). For example, some prepaid debit cards report bill payment transactions to credit bureaus. A college student can use one of these prepaid debit cards to pay rent and utilities, and those payments will be reported to credit bureaus, allowing the student to build a credit file. Prepaid cards have other benefits for young consumers, including the ability to avoid overdraft fees and penalties which are common with traditional bank accounts.

With proper financial management, young adults can enjoy the protections of the CARD Act and establish a credit history.

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