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Archive for Tuesday, March 2, 2010

Credit due

New restrictions on credit card solicitations and applications could save young people from some painful financial lessons.

March 2, 2010

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Remember when people had to provide some evidence that they could pay their debts before credit card companies were interested in their business?

New credit laws that went into effect recently will be a step back toward that time, and although young people may find the new restrictions bothersome, the rules provide valuable protections for people learning to manage their money.

Credit card companies will be barred from on-campus solicitations that offer free T-shirts and other tokens to college students who apply for cards. The new laws also require people under 21 to demonstrate some ability to pay their own bills before obtaining cards. If they can’t do that, they will have to have a co-signer who will take responsibility for their account.

We used to call this “establishing credit.” It was a process by which people showed they could pay their bills or borrow money — maybe a student loan or a layaway account — and then pay it back, hopefully on time.

Somewhere along the way, the ability to pay, especially on time, became immaterial to credit card companies who were perfectly happy to let young people run up credit card debt far beyond their ability to pay it off each month — or, maybe, ever. The companies then could charge exorbitant amounts of interest until a parent or other responsible party stepped in and bailed the cardholder out.

This may have provided a valuable lesson for some young people, but that lesson came with considerable pain for cardholders and, often, their parents, who paid off the bills to protect their child’s credit. Now, students without a credit history, in most cases, will have to turn to parents to co-sign their applications for credit cards. Most parents don’t mind their children having a credit card for emergencies, but they probably would balk at co-signing for multiple credit accounts. The new law gives them at least a moderate check on their children’s credit card use.

It would be nice if all young people, whether they are attending college or not, understood the dangers of overusing credit cards, but that isn’t the case. It has been much too easy for young people to be drawn in by the lure of spending now and paying later without understanding how long it will take to pay off their debt and how much interest they will pay in the process.

The new laws that curb campus solicitations and require co-signers are a good step that may help young people learn how to handle their credit without digging themselves into a financial hole.

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