Friday, July 24, 2009

Credit Card Accountability Responsibility and Disclosure Act

At President Obama's request, Congress recently passed legislation to protect consumers from rapacious credit card companies practices. I have written at length about how credit card legislation is necessary to protect all Americans, but in particular college students, whose credit card use often leads to overspending and amassing debt.

Every fall, credit card companies descend on college campuses armed with free gifts to entice students to sign up for credit cards. The newly-enacted Credit Card Accountability Responsibility and Disclosure Act of 2009 attempts to curb these practices. In 2010, a credit card company will not be able to issue cards to a consumer under the age of 21 unless the consumer has a consigner or demonstrates he or she is financially capable of repaying credit card purchases. Unfortunately, that means students with limited resources and from economically disadvantaged backgrounds could be shut off from obtaining credit when they need it most (i.e. to purchase books for classes). The Board of Governors of the Federal Reserve System is supposed to propose safe harbor provisions to prevent this problem.

The Board should also come up with guidelines regarding mandatory education. The root of the credit card debt problem among college students is illiteracy. The Board could create a model program that universities could institute to educate their students on responsible credit practices. The kind of education that is necessary is financial education that enables students to make financially wise decisions and protect their credit history – the asset or liability that will follow them the rest of their lives.

Creola Johnson
Professor of Law
The Ohio State University Moritz College of Law

5 comments:

  1. professor johnson:

    the new credit card law will not allow individuals under 21 years of age to secure a credit card without a co-signor or evidence that the individual is financially capable (whatever that means). do you believe this will curb the credit card companies out-of-control solicitation of college students? one of the linked stories indicates that a college-aged student received 52 credit card offers in a one year period.

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  2. I have mixed emotions about this legislation. I do think it will help protect many college-age students from amassing a mountain of debt. Which is desirable. However, I remember that my college credit cards were vital lifelines to pay for books, travel, and other major expenses as a college student. Professor Johnson does a nice job of acknowledging this tension. At the end of the day financial literacy is important. I don't think many parents, and definitely not our educational system, do a good enough job of educating young adults about financial matters.

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  3. Joe, I agree with your sentiments. The critical problem, as is normally the case, is the lack of financial knowledge. While I agree that the legislation is extremely important, of even greater importance is need for increased financial education, especially in disadvantage communities as it is these communities that are most often the victims of predatory lending practices and exorbitantly high interest rates. It is a travesty that many colleges allow students to graduate with little to no financial competency. Upon graduation from college, every student should have a basic understanding of financial accounting and be able to understand how to create and to read an amortization schedule.

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  4. Raechelle YballeJuly 27, 2009 at 7:24 PM

    I'm also wary of the legislation. As a banking attorney who focuses on consumer finance, I agree that credit cards, if used reponsibly by students, can be an invaluable lifeline. What worries me about this legislation is that it targets individuals who should be building their credit history through responsible use of revolving credit, student loans, and other installment loans, etc. What I do see among younger borrowers is a lack of knowledge of basic financial terminology as well as a lack of appreciation of both the benefits and pitfalls of credit.

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  5. I agree with Raechelle.I received my first credit card at the age 16. I now have a 800+ credit score. While this is not the norm, having a credit card at a young age helps build credit history. The reason many credit scores are low is not only from the debt from unpaid credit cards, but student loans that go unpaid,as well as unpaid medical bills.
    Wouldn't it make more sense to start financial training at a younger age like elementary schools. It also needs to be reinforced at home. Many are ignorant of how to use credit wisely and the risk associated with it's use.

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