Student credit cards have long been a favorite, if controversial, way for issuers to acquire customers at the beginning of their financial lives. Affinity relationships with schools and alumni associations have also proven lucrative. But by February the opportunities will be severely narrowed by the Credit Card Accountability, Responsibility and Disclosure Act, which will restrict the industry's ability to market or issue cards to anyone under the age of 21.
"For this class of people, people under the age of 21, creditors are going to have to have a different structure" to process applications, said David Thompson, a member in the Cleveland office of the law firm McGlinchey Stafford PLLC and a former counsel for Fleet Financial Group Inc.
Or no structure at all. Issuers "try to make things as streamlined and consistent as possible … and I don't think many issuers are going to show a great deal of patience" for adding separate procedures for a subset of applicants, Thompson said. Hence, the lenders may be "disinclined from extending credit to this class of people," he said.
Most major issuers would not discuss their specific plans for compliance with the law's restrictions on issuing cards to those under age 21. But Nessa Feddis, a senior federal counsel for the American Bankers Association, predicted that compliance will be too expensive and difficult for some companies to continue issuing cards — on campus or off — to any young consumers.
"There may be some banks that will decide that the compliance challenges and burdens outweigh the number of cards that they issue to people under 21," Feddis said. "I think that many students still will be able to obtain cards, but they may not have as many choices, and some students may not be able to get a credit card."
Most card companies have already started making some changes to other practices in anticipation of the law or its effects. American Express Co. and Discover Financial Services, for example, said this month that they would discontinue the widespread practice of charging overlimit fees rather than comply with the law's expensive new "opt-in" requirement for such fees. Aug. 20 was the deadline for some of the law's other requirements, including a 45-day notification of interest rate increases and a 21-day grace period between when a statement is mailed and when it is due.
But so far, while several issuers (Discover, Amex and Capital One Financial Corp.) said that they do not market on-campus, none have taken the lead to pull back from lending to consumers under 21.
Feddis and others attributed this hesitation to a clause in the new law that requires further rulemaking from the Federal Reserve. The law requires anyone applying for a credit card while under the age of 21 to have either a legal adult co-sign the application, or to prove they can handle the debt themselves. She said the Fed is expected to issue rules by November defining that "independent means of repaying."
Young consumers, who usually have thin credit histories and receive small initial credit lines, make up a small part of issuers' business. For the past 18 months, consumers between the ages of 18 and 25 have received a scant 1% of all credit card acquisition direct mail sent to the households tracked by Mintel International Group Ltd., according to Andrew Davidson, a senior vice president.
