The Lansing State Journal
http://www.lansingstatejournal.com/article/20100829/NEWS03/8290501/New-credit-card-law-safeguards-students

New credit card law safeguards students

August 29, 2010

Melissa Domsic
mdomsic@lsj.com

Credit card companies liked Michigan State University football games almost as much as their student fans.

The card issuers used the games to sign students up for credit cards, luring them with freebies such as green-and-white blankets or T-shirts.

But that won't be the case this fall. Card issuers won't be allowed to set up tables at Spartan football games due to a new federal law banning such practices on college campuses.

And students under age 21 who want credit cards will have to get co-signers or prove their ability to make payments before getting approved.

Government rules

The changes are the result of new federal credit card rules that went into effect in February.

Parts of the law were specifically designed to safeguard young people, who can be vulnerable when it comes to understanding personal finance, said Connie Costner, a household finance expert at the Michigan State University Extension.

"Unfortunately, what has happened traditionally is when students find themselves on campus, there's an opportunity to target those students whether they have the income or not to pay back what is essentially a loan," she said.

"A lot of students think of this as free money. If you don't understand that credit is basically a loan, that's a big challenge."

84% had plastic

Eighty-four percent of the student population overall had credit cards, according to an April 2009 study by student lender Sallie Mae. That was up about 11 percent since the fall of 2004. The average balance for undergraduates was $3,173, according to the 2009 Sallie Mae survey.

Employees at Michigan State University Federal Credit Union, which serves 25,000 to 30,000 MSU students, talk with students and their parents about credit so that they can make informed decisions, said spokeswoman April Clobes.

The credit union, which issues Visa cards, has seen about a 10 percent drop in card applications, Clobes said. "I think a lot of people are afraid. They think, 'I can't get a credit card,' " she said.

Students can still get cards, though credit limits have been reduced to $500 from $1,500. They can get the $1,500 limit if they can demonstrate the ability to make payments, Clobes said.

At Dallas-based Comerica Bank, students can apply for a "College Rewards Visa Card." Applicants must be at least 18 years old and attend college. There's no annual fee and credit limits vary, said spokeswoman Kathy Pitton.

Comerica also offers a "Young Adult Visa Card" to customers at least 16 years old with a qualifying co-signer who earns at least $12,000 annually.
Financial counselor Joe Burm said he hopes the credit card rules mean "a new era of financial education and more responsibility." Burm works for GreenPath Debt Solutions in Lansing. The Farmington Hills-based nonprofit offers free debt counseling services.

"The biggest advice I can give them is don't rush into getting a credit card before you understand the true cost of using credit," he said.
Burm said he's seen people who rack up debt in college and have a hard time dealing with expenses once they're out of school.
Alternatives to regular credit cards include debit cards or secured credit cards.

"The debit card is perfect. It's money that you have. It's just like spending cash," Burm said. "Another thing is the secured credit card. Those are great ways to establish credit."

It's important for students to establish credit so they'll have an easier time renting apartments and getting car loans, Clobes said.

Additional Facts
Options for students under age 21

Credit card with co-signer

• An easy way around not having your own credit card is to get a parent to co-sign. That gives the student both access to credit and the benefits of establishing a credit history, said Jonathon Joy, a credit counselor with Advantage Credit Counseling Service, a nonprofit organization in Pittsburgh. 
• But if a student defaults on a payment, the parent's credit score can get hit. 
• Also, the new law requires that co-signers must remain connected to the credit card after the cardholder turns 21 if the cardholder can't prove he has enough income to make payments.

Authorized user on parent's card

• Like having a co-signer, becoming an authorized user on a parent's card puts two people at risk for a damaged credit score if the student misuses the card such as by going over the limit, Joy said. 
• But one advantage is that parents can more quickly see the credit card activity as it occurs instead of after a nonpayment or default situation has snowballed.

Debit cards

• The major drawback to using a debit card connected to a checking account is that it does not help build credit history.
• Joy said the more students can rely on cash, checking accounts and debit cards, the better. That way, they stay out of debt.

Secured credit cards

• With a secured credit card, the student puts money into the bank as a form of security and the credit limit is determined by what that amount is. Most require at least a $300 to $500 deposit. That money is put aside as collateral and the student is granted a line of credit for the same amount. If the cardholder defaults, the deposit funds are tapped.

Take on a bigger student loan

• Another option for students who need extra cash to purchase school-related necessities might be to tap a larger student loan. That can be good in one way: Loan payments are factored into a student's credit history, so a student who makes payments promptly will see that reflected in her credit score. Keep in mind, though, that students' credit will not be strengthened until after they graduate, when student loan payments become due.

Source: Rebecca L. McClay, MCT News Service