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By Herb Weisbaum ConsumerMan
msnbc.com contributor
updated 3/10/2010 3:25:33 PM ET 2010-03-10T20:25:33

Credit card companies have a simple marketing strategy: Get your customers while they are young. This explains why banks try so hard to sign up college students, even though most of these kids have no credit history and no steady income.

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“They look at the income potential of college students as graduates, not what they are currently making,” explains Bruce McClary with Clearpoint Financial Solutions, one of the country’s big non-profit credit counseling services.

What’s good for the bank is not always good for the cardholder. Most students these days graduate with thousands of dollars in unpaid credit card bills.

“We do see a lot of college students who get in trouble with credit cards and it carries over to later in life,” McClary said. “Well after college they are still struggling to get out from under that mountain of debt.”

A study by Sallie Mae, a leading provider of student loans, found that college students are relying on credit cards more than ever.  Based on its survey done in the spring of 2008, the average undergraduate at that time had credit card debt of $3,173. Half the students had four or more cards.

The study’s authors conclude: “Many college students seem to use credit cards to live beyond their means — not just for convenience — and more than three-quarters incurred finance charges by carrying a monthly balance.”

The Credit Card Accountability, Responsibility and Disclosure Act ( Credit CARD Act ) which took effect a few weeks ago, tries to deal with this problem.

“The act considers the poor practices that credit card companies use to entice students without allowing the students to realize the full consequences of having a card,” says Yvonne Hubbard, director of Student Financial Services at the University of Virginia.

CARD greatly limits what banks can do to market their cards to anyone between the ages of 18 and 21, with added restrictions on how they treat college students. In many cases, parents will need to be involved in deciding whether their son or daughter gets a credit card before turn 21.

“I think it’s really helpful to have an adult weigh in and be an influence on a kid under the age of 21 who is considering taking out a credit card,” says Sally Greenberg, executive director of the National Consumers League. “This will ultimately help protect young people from getting in way over their heads with credit cards.”

Can you pay the bills?
Before the CARD Act took effect on February 22, banks often gave 18-, 19- and 20-year-olds (especially college students) credit cards without considering if they could pay the bills. Those days are gone.

The new law says young people who don’t have a good credit history (and most don’t) must show their ability to make the monthly payments. That could be proof of employment — for students that can be a summer job or part-time work during the school year – investment income, alimony or public assistance.

Otherwise, they’ll need a co-signer to get the card. That could be a mom or dad or any other adult willing to put themselves on the line.

“As a co-signer you are responsible for that debt even if your child defaults. It’s their card, but you’re the backup on it,” explains Greg McBride, senior financial analyst with Bankrate.com.  “You really need to think about this. If Junior defaults on those payments the card company is going to come after you and that can have a negative impact on your credit.”

A slice of pizza for a credit card?
You probably wouldn’t apply for a credit card in order to get a T-shirt, tote bag or a few slices of pizza.

But college kids will.

Banks have successfully used these freebie promotions on campus for years. The new law says a student cannot be required to fill out an application at a marketing table — on or near campus — in order to get a free gift.

“Take the T-shirt or the pizza and then walk away without the credit card application,” advises Ed Mierzwinksi, director of consumer programs for U.S. PIRG. “They can no longer require you to fill out a credit card application to get a free piece of pizza. They never should have been allowed to in the first place, but they got away with it.”

Financial literacy is needed
The Sallie Mae study found that one in three students rarely or never discuss credit cards with their parents. Nearly all undergraduates said they would like more information on financial management topics.

Curtis Arnold, founder of CardRatings.com, believes this is critically important. He supports government action to protect college students from predatory lending practices, but believes education and parental involvement are better than any regulation. Arnold, who had $45,000 in credit card debt when he finished graduate school, uses himself as an example when he talks about financial literacy on campus. 

His son, Dallas Tompkins, 19, attends Hendrix College in Arkansas. Dallas would like a credit card, but he doesn’t have one.

“We know he’s not ready,” Arnold tells me.  “If he proves that he can be responsible with his debit card, then we’ll co-sign a credit card with him.”

The bottom line
The CARD Act will make it more difficult for some responsible young people to get a credit card and establish a credit history until they are 21. Because of that, they could find it harder or more expensive to rent an apartment, buy a car or get insurance.  

Hopefully it will keep many 18-, 19- and 20-year-olds from digging themselves into a hole very early in life. Signing up for a credit card is not something that should be done in order to grab some pizza while racing to class. It an important decision with significant ramifications that needs to be thoughtfully considered.

The new law calls on colleges and universities to do a better job of educating their students about managing credit and the consequences of debt.  Financial planning experts say parents need to do the same thing – and well before their kids go to college.

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