But there is one feature of the new bill that I do find odd: It restricts people under the age of 21 from getting a credit card unless they have a co-signer or an independent source of income that they can use to pay off their balance. But why on earth don't we want college students to take on debt?
Part of the issue here is good old horizontal fairness. What, so our country's 18-year-olds can fight and die and vote, but can't even declare personal bankruptcy or default on a subprime mortgage? I am all for society drawing semi-arbitrary lines between adults and kids -- that's just an intractable problem for a democracy. But we can at least do it consistently.
The second problem is more specific: if the the point of credit-based consumption is to bring lifetime consumption more in line with lifetime income -- as I believe it is -- then college students more than anyone else should be getting into debt. They have the largest gap between between desired present consumption and expected future income. That is a gap society can and should try to regulate, but it also one society should try to close.
More to the point, college students actually seem to use credit cards for educationally useful things like textbooks and tuition.
(That information is from Sallie Mae, so it's a bit like the foxes reporting on the henhouse. Take it for what you will!)
This is separate from the question of whether college students should have credit cards, but I'm horrified to read that 30% of college students are putting their tuition on credit cards.
Even kids who are just using plastic as a stop gap and not carrying that debt as a balance are probably getting hit with significant fees for the convenience of paying with a credit card.
Huh? I got serious cash back for putting tuition and fees on my credit card and paying it off at the end of the month when I was a student. I never carried a balance.
Conor — That most college students use credit cards to pay for some part of their educational expenses tells us nothing about what fraction of students' credit card debt goes to such expenses. If restaurants were a category in this graph, I bet it would be at least as high as textbooks, but so what?
Moreover, the theory behind consumption smoothing only really holds if real interest rate one pays is not much higher than the rate at which one discounts the future. Otherwise pulling back expected future wealth is net costly, and a bad deal even under the terms of the model. College students may pay a 20% real interest rate on credit card debt. For that to be rational, it really must be true that college students not only live for today, future be damned, but also that those preferences be time consistent, so that a decade later they will reckon a dollar's worth of consumption during college days was worth sacrificing $6 in their early thirties.
Income smoothing and the permanent income hypothesis are frequently used justifications of consumer credit, and in theory it's a perfectly reasonable idea. But in practice, the numbers usually don't work out. For the rare (and very unlucky) student who has an inherited home, taking a 6% home equity loan to to consume well until an income kicks in might be a good idea. But taking on expensive credit card debt as a college student is almost never a wise form of consumption smoothing.
Sure, let's raise the voting age to 21, better 40.
A parent can add a child to their credit card.
We paid for our kids to go to college (one left to go, second one graduated yesterday) but it was easier to just have them pay with the credit card at school (no fees until now...... so we're going to deposit the cash in the youngest child's checking acct and she can use her debit card).
By putting the child on the card, it establishes credit for them in their own name.
And I racked up the gift cards as a rewards perk.
Of course if you don't believe your child can handle having a credit card, you wouldn't want them on your card, but then those are probably the ones who shouldn't have one anyway.
The minute my college bound children were eligible for credit cards, I encouraged them to apply. Learning to use credit wisely, including paying in full at the end of each month, negotiating fees, dealing with ever changing due dates, juggling receipts, etc., while still under the relatively watchful eye of a parent is an important road to financial responsibility. It is appropriate to start this process while the teen still has a need and willingness to share their purchasing information with the parent(s).
While in college, one of the few times I didn't use a credit card to pay for my books was my very first semester (I was only seventeen and didn't yet have a card). Having to carry $350 into the bookstore struck me as ridiculous.
For the rest of my college career, I used my credit card on text books as well as for other convenience purchases so that I didn't have to carry so much cash around campus.
But, as a convenience user, I paid off my bill every month. I did not go crazy by purchasing every shiny new thing. I bought books (not just textbooks). I bought lunch when I couldn't make it back to the meal halls. I bought the occasional CD and DVD.
More useful than simply forbidding these cards would be stronger efforts in public education as to the ramifications of credit card debt. Along with this, lower credit limits for college students could help prevent crushing high interest debt from being acquired.
The first step, however, is to get those seductive and ubiquitous promotional credit card sign up tables off of college campuses... they entice untold numbers of students to sign up in return for a free tee-shirt or ridiculous bauble.
WTF are you talking about? You sound like one of the saps who is somehow under the impression that everyone is entitled to a 3-series BMW in the driveway of their $2500sqft+ home itself outfitted with marble baths and flat-screen televisions.
Also, if you don't like living with the sometimes "questionable" actions of Credit Card companies, then don't use a credit card. Otherwise STFU and live within your means. Unless you live in NYC (etc), a family earning say, $70k/year is hardly roughing it. Can you have a Porsche and vacation house in Nantucket? No, but you also don't deserve it. You don't make enough money to get all the stuff you want? Go back to school, educate yourself, work harder, work smarter, but shut the hell up about a "decent life for 90%."
Anal_yst
http://1-2knockout.typepad.com
You would probably find that most college students do use their credit cards a lot, just like everybody else. To allow unscrupulous banks and others to charge usurious rates with unconscionable rules where they can change the rules in midstream and raise the rates by whim is not the American way. There isn't suppose to be a bunch of cheats fleecing the American people of their money. Many of the people here would not even use credit cards if they made a decent living, but the way it is they keep lowering the wages each year and raising the prices. Making money is great but hustling and swindling people by having lobbyists' who persuade politicians to write rules that allow big companies a free for all with ordinary people is just plain wrong! Lets get back to our basics where we had a decent life in this country for 90% of the people instead of where there is a decent life for 10% of the people! We do not need to live in a junkyard because of some selfish business people who have temper tantrums whenever they do not get their own way. A return to fairness and a return to the American way would be appreciated. I seriously think that many of these so called 'businessmen' are actually people who want to destroy our way of life so that they can make a fast buck and end up on top!
The notion that access to credit card debt for college students is a nutural part of American society which aligns personal consumption with self-imagined permanent income is a specious afront to personal responsibility and Milton Friedman's concept of permanent income. If the current realignment of economic forces has taught us nothing else, it is that liar's loans for real estate purchases shift the consequences of irresponsible behavior by both borrowers and lenders to society at large through defaults, foreclosures, and bankrupcies. Similarly, the nation's current approach to universal access to health care is to direct the uninsured to emergency rooms while shifting the cost to government at all levels and to businesses and individuals through higher health insurance premiums. Just as the emerging concept that universal health care involves personal responsibility to be covered by some form of health insurance at affordable prices, so the access of individuals to unsecured debt such as credit cards should be based on a demonstrated ability to repay. College students should not be able to borrow money without repayment (as shown through high default rates), and lenders should not be allowed to shift such costs to those who pay their bills by grubbing for high interest rates and arbitrary fees.
Who cares what the breakdowns are proportionally, consider the overall thing! I would first recommend comprehending the totality of a students budget as it actually exists, both in cost and breadth of "needs". Then, understand with smart financial decisions rather than winner take all abandon, it is possible to successfully manage a college career in a cost efficient manner.
There are solutions!
Before taking this too seriously, if you weren't so blazingly factual, I would almost think you were joking. Perhaps I am only confused by your delivery.
I think that the author state that the sole purpose of credit cards is to equalize lifelong earnings with lifelong debt. Even if that was the only purpose of establishing credit, that's not a good thing. If that were true, you would want every citizen to die with out a dollar to his/her name. Some people can do this (my grandfather nearly did, only had a Cadillac, and a house left when he died), but it takes a special kind of person to do so. On that note, the personal savings rate in this country is dwindling down to next to nothing, and that needs to change (in the last few months it has gone back up due to this massive recession, which was mostly caused by irresponsible lending). Giving young adults credit cards puts a major handicap on their ability to save when they start their careers and on top of that, they won't develop the habit of saving.
The first point our author makes is just completely silly. You want to give an 18 year old the opportunity to f@#$ up?? More often than not, an 18 year old will do so. That is the very nature of a youth, to make mistakes. They have no experience and likely will make bad decisions most of the time. I'm sure that for every example of a responsible young adult you name, you could probably find ten financially irresponsible ones.
Lastly, let me say this: most trust funds are available to their beneficiaries at 25, not 18...why do you think that is? Rich people are not stupid.
Let them dig themselves into debt as deeply as they can. I worked part time (and sometimes full time) while in college. I had income, therefore I could get credit. By the time I graduated from the university, I was several thousand dollars in debt. Not school debt, mind you, but "junk" debt from using credit cards to buy things I didn't need with money I didn't have to impress people I didn't like. It took almost three years after I graduated to get myself out of that mess. And guess what? It is now 25 years later, and I haven't done that again since. Not once.
The school of hard knocks is better than any college or university on the planet. Everyone should have the opportunity to attend there at some point in his/her life. So let these kids dig themselves in as far as they can dig, and while they are still young enough to crawl out of the hole they dug for themselves.
And Mom, Dad...put your checkbooks back in your pockets. You didn't get your kid(s) into this situation; it's not your responsibility to get them out of it.
Credit cards are really only a minor issue for the college crowd. By far the bigger problem is the student loan debt they are carrying, debt that while unsecured, is not dischargable in bankruptcy court, like credit card debt.
When I was in college, I graduated with about 5 grand in credit card debt, which I paid off by taking a student loan, which carried a lower interest rate.Unfortunately I made the mistake of going to law school and racking up 130 grand of supposedly "good" debt, debt that was an investment in my future, or so the previous generation told me.
Lo and behold, when I graduated I couldn't pass the bar and had to look for other employment. I consolidated all my student loan debt and the interest rate averaged to 8% after all my consolidations. That's 8% on over 100 grand of debt.
Sorry boomers, you're behind the curve here. The real crisis for gen Y is not the plastic we used for the college parties, but the tuition bills you placed on our backs by turning student lending over to loansharks.
Rarely do I come across a piece where the premises are utterly stupid. But this is one.
1) In what universe should anyone under the age of 21 get a credit card without a co-signer or an independent source of income that they can used to pay off their balance? No financial institution in its right mind should ever make credit available under such circumstances. But for the presence of predatory lenders, no legislation would ever have been needed.
2) The author claims that such legislation runs contrary to college students' constitutional right to get into debt. Baloney! College students have ample opportunity to take on debt. It's called student loans.
What the legislation does do is to protect college students from predatory lenders providing debt at usurious interest rates with outrageously expensive, often hidden fees. The industry's game is to get students to amass impossible amounts of high interest debt and then count on parents feeling sorry for them and ride to their financial rescue.
Credit cards are simply not necessary for college students.
And I should know. My 23 year old college student has never had a credit card and has never missed it. He simply uses his debit card to buy books, supplies and pay for commuting and other costs. Tuition and fees are paid by check or by parental credit card or by direct transfer of student loan monies to the university.
BTW lack of a credit card has not prevented my student from amassing plenty of debt in the form of student loans.
Debt is a cage, if not used wisely. Most people, college students AND grown adults included, do not understand debt. So, most people put themself into a cage made out of credit.
My college professor told me years ago that "you (student) DO NOT want student loan limits to increase or Federal grants to increase." He explained that these increases DO NOT help students, but allow schools to increase tuition. In the end, more credit becomes the bricks pilied onto a sinking ship...
Debt, and the "urban sprawl" of the money supply, has created the global mess we are in now. Thinking of new ways to create debt is not a sound position to advocate.
Now, if the author's position is to promote responsibility and freedom, then I would agree whole heartedly. In that case, the title might read, "Let Stupid People Touch Hot Pans - If They Are So Inclined." In my opinion, touching hot pans is what makes stupid people smart people. Credit is a hot pan. College students should have the right to touch it... though, promoting the burn is just as stupid as the touching.
I'm in firm agreement with Mr. Clarke that we shouldn't discriminate between adults. Either you are, and you're expected to act like one, or you're not, and you have a guardian responsible for you.
I'm in firm disagreement with Mr. Clarke that tuition is a responsible think to carry on your credit card (and he seems to mean carrying the credit, as just paying with credit card and immediately paying it off doesn't have the tie to future income that carrying the balance does).
I've an open mind, however, as to the solution of this problem - I have no problems requiring adults of any age to show proof of income or have a cosigner help them get the card.
I doubt that the author's intent is to promote responsibility and freedom. More likely, he's a paid industry plant. No one else would take the time to write such garbage.
The amount of student loan debt taken on today by some students is truly scandalous. More scandalous still are the usurious interest rates charged by some lenders, including SallieMae. I recently co-signed one, thinking I knew the interest rate (SallieMae absolutely refused to disclose the exact rate in advance). When I saw the actual rate, it was almost as high as my credit card rate. Needless to say, it will be paid off ASAP.
Expansion of the federal direct student lending program is a welcome response to SallieMae's usurious rates. Students and parents everywhere should be urging their Senators and Representatives to support Obama's proposals and put SallieMae out of the student loan sharking business.
Bad ideas don't require financing to exist.
(sorry very off-topic)
An interesting discussion, with many good points made for and against the idea of letting college students experiment with credit cards. It is a pity that a similar discussion as to the wisdom of giving them (and many others) easy access to weapons does not seem to take place (or if it does has little influence on political action).
Real physical biological human beings (as distinct from ideological humans of various people's imaginings) do not suddenly become neurologically able to handle all the responsibilities of adulthood at age 18. A part of the brain that controls risky behavior does not fully develop until age 25.
I'm a 19-year-old college sophomore. I have two part-time jobs, an annual disposable income around $5,000, and I use a credit card for all my purchases, really mostly for convenience. I don't like carrying cash, and I'm terrified of the $35 overdraft fees on debit. I also appreciate that I can pay for books at the beginning of each term (by far my biggest fixed expense, excluding tuition, of which I pay about 80% with loans and scholarships and my parents make up the difference) without worrying about the timing of my biweekly paycheck.
The card itself is a real piece of crap, with an APR near 20%, no rewards program, and a credit limit of $750 (lacking a credit history, it was the only card I qualified for). The interest rate is irrelevant, because I pay my bill in full each month, but I'd like to trade up to a card with a decent rewards program once my credit history is more firmly established. I somewhat resent the fact that these reforms will make it considerably harder for me to do so.
I told my (Swedish) parents about all this, and they said, "So when exactly are American children supposed to grow up?" I really wonder the same sometimes. Couldn't they just have capped the line of credit and required proof of income?