College students, we’ve got bad news – credit issuers are still preying on you and your friends. Though we thought the regulations imposed by the CARD Act had finally put a stop to these shenanigans, a new study by University of Houston law professor Jim Hawkins has proved us wrong.
In the first empirical assessment of the CARD Act’s impact on the notoriously dangerous student credit card market, Hawkins has found that not much has changed in the three years since the legislation was passed. That may be good news for Wall Street, but it’s a troubling revelation for everyone else. Here’s how things shook out.
When we first heard that the CARD Act would tighten the regulations on lines of credit for college students, we were ecstatic. Who wouldn’t be? Next to student loans themselves, inflated credit card balances were the biggest financial problem plaguing America’s college students in the years leading up to 2009. The unchecked industry bombarded students with millions of offers for pre-approved cards every year, despite the fact that many student cardholders lacked the income and/or fiscal know-how to repay the debts that they incurred. Some cards even carried limits as high as $10,000.
The CARD Act was supposed to put a serious choker on this harmful (if not evil) practice. The new regulations prevented banks and credit issuers from offering cards to anyone under 21 without a cosigner or proof of income. On top of that, card issuers were banned from running promotions on campus – meaning no more handing out T-shirts on game day to kids who sign up for a card.
Finally, the general provisions of the act required issuers to make their card agreements easier to understand for everyone, meaning that students would have a better idea of what they were getting themselves into when they opened a line of credit. Though some experts were concerned this wouldn’t be enough to contain the out-of-control industry, we thought it sounded solid enough. Unfortunately, we were wrong.
In his study, Hawkins interviewed 500 different students and reviewed more than 300 different credit card agreements. According to the report, 68% of students received pre-screened offers for cards in the mail. Additionally, 40% of the students reported seeing card companies giving out gifts on campus. “Most troubling,” Hawkins told MarketWatch in an interview, “[is that] students are still qualifying for credit cards without demonstrating an ability to repay the debt. My study found that 27 percent of students under 21 who were applying by themselves for credit cards listed loans as part of their income to qualify for the card.”
As for the agreements themselves, Hawkins found that 64% of them have remained unchanged since 2009.
Now, this isn’t to say that the CARD Act has had no effect whatsoever in stopping the spread of bad-faith student credit cards. In the same study, Hawkins also found that the number of offers being mailed to students has fallen off slightly. However, he says this change will remain painfully gradual until the loopholes card issuers are using to get around the new regulations are closed.
“If Congress was concerned about people under 21 receiving credit card offers in the mail, it could directly prevent that conduct by making it illegal to mail anyone under 21 a credit card offer,” Hawkins says. “Similarly, if Congress was concerned about abusive terms in the agreements between credit card companies and colleges, it could directly forbid those abusive terms instead of just requiring companies disclose the agreements.”
This study should serve as a wake-up call to consumers across the country. Though the CARD Act has led to many welcome changes in the credit industry, there is still a lot of work to be done before credit will be totally safe for our children. Maybe it’s just us, but we think that accepting a free Frisbee for signing up for a credit card should be an automatic disqualifier on an application. But hey, what do we know? We’re just a finance blog.