WEST LAFAYETTE, Ind. — A small piece of plastic could significantly affect credit unions' relationship with young adults.
With the CARD Act now requiring youth under the age of 21 to have mom or dad co-sign for a credit card, that step could limit the number of cards issued to Gen Y, and potentially affect membership and other lending products down the road, industry experts suggest. And no credit unions are more aware of that than those that serve colleges.
"This is significant. It puts a barrier in and a level of hassle that was not there before," said Purdue Employees FCU CEO Bob Falk, who noted that the rule applies to young adults without an income source. "So many kids tell us that we were their first card in their hands, and they did it without their parents knowing. It gave them independence, a chance to grow up, and we made some longstanding members. You provide a small credit limit of $500, kids can't strangle themselves, and it gives them a way to buy something and pay it off. A lot of them use the card to purchase plane tickets to go back home."
Falk predicted that the $600-million PEFCU will lose some credit card business, and potential members, due to the rule, as well as deeper relationships with young adults—which is why the CU has dedicated a lot of human resources to determining a solution. The biggest change will have to happen as the credit union signs up freshman when they first arrive on the Purdue University campus in August.
Falk said PECU is considering giving youth below the age of 21 a credit card at that time, but not making it active until a parent co-signs. That way the credit union saves a step, and the piece of plastic in kids' hands provides incentive to get parents to sign on, Falk said.
"We get 7,000 new freshmen on this campus, and their parents may or may not be with them, and that is when we open the majority of cards—maybe 1,000 in the first couple weeks of school. But if we kick out the plastic and the parents don't sign on, then we have wasted a bunch of money. We have not decided yet."
Falk said the credit union is also looking at ways to allow parents to sign electronically, and to automatically remove them when the child reaches 21. "We are looking at how we will give parents some view access and some e-alerts, as well—make it so they can at least see what's going on because they are legally liable."
PECU currently has 10,000 student Visa cardholders and $4 million in outstanding balances on a card that charges 17.5% APR fixed.
Falk, and LowCards.com CEO Bill Hardekopf, agree that the new rule can have effects beyond losing cards to some youth under 21. "Many young adults will not take the extra step to have parents co-sign, losing out on the opportunity to build up a good credit history throughout college," Hardekopf told Credit Union Journal from his Birmingham, Ala., headquarters. "Without a positive credit history, they may not receive a good interest rate on their first house or car loan, and the loan will be tougher to get."
Rick Burden, SVP-chief lending officer at Notre Dame FCU in South Bend, Ind., while acknowledging the new rule will impact the number of Visa cards the CU provides to students of Notre Dame, Holy Cross, and St. Mary's, emphasized that NDFCU's concern is for the young members. Stressing the fact that the credit union's student Visa teaches new cardholders to manage credit responsibly, Burden said the new CARD requirement may prompt students to pass on the CU's Visa when they first arrive on campus, leaving them open to more "fly-by-night credit card offers that come in the mail. These cards won't have the safeguards that we have in place, like a fixed rate, no annual fee, and limits that are based on their years in college." NDFCU's 14.92% student Visa currently has 12,000 cardholders.
But in Los Angeles, Gary Perez, CEO of the $350-million USC CU, expects a positive impact from the new rule, stating that credit unions will do a better job of explaining the CARD requirement than banks and will work with potential members more closely. "Certainly this is challenging. Nevertheless, we believe students will gravitate toward credit unions. I think this is the opportune time, especially at university-based credit unions, to make significant inroads in the credit card space. Because of our reach and on-campus presence we have the ability to touch consumers in a manner unlike banks."
USCCU currently does not have a credit card portfolio, having sold it in 2003. But it will launch a credit card—pricing has yet to be set—before the kids come back to school in August. Perez said the credit union usually turns USC's gym into "one large remote branch" for two weeks during student orientation, which parents are required to attend with students. At that point the credit union will add information about the CARD Act to the education workshops it conducts and to the information it hands out during the two-week blitz.
"It's our intent to get parents' signatures on the credit card application at account opening," Perez explained. "If that's not possible, we believe that students will proactively get their parents to sign simply because it's in the students' best interest to do so. Our game plan is to gain the students' authorization to contact the parents on their behalf, that way we can process their co-signer application electronically and, just as important, take the opportunity to introduce other value-added CU products to parents."
