Parents should be particularly elated about one section of the freshly adopted credit card law that could keep young people out of debt.
The Credit Card Accountability, Responsibility and Disclosure Act prohibits card issuers from extending credit to a person under 21 unless one of two conditions is met.
Pay attention, parents, because you've been given great power - and I want you to use it.
Under one condition, the card issuer has to verify that a young adult has the "independent" financial means to repay any credit that has been extended. One would think this would have always been the case. And yet, we know that lenders -- counting on a parent or another responsible adult to bail out a young person -- have granted credit to underage consumers living off student loans or income from low-paying jobs.
Under a second condition, a young adult could get a credit card if a parent, legal guardian, or an individual 21 or older agrees to sign a credit application as a co-signer.
The law says you have to agree to be jointly liable for the charges. Don't interpret that to mean you are only liable for half. When you co-sign, you are agreeing to become fully responsible for all the debt.
So I'm recommending you don't co-sign. Tying yourself to how someone else pays his or her bill can damage your credit. But more importantly, as I've always said, there's little if any reason for a young adult to have a credit card, particularly if the person doesn't have a full-time job. Don't mess up this opportunity to teach cash-management skills.
The new law has the potential to prevent the suckering of millions of young people into credit card debt. However, it won't work as intended if parents or other adults cave in and co-sign.
It doesn't matter whether you have a family agreement that your child will pay for any charges rung up on that credit card. One missed payment, and you get the bad mark on your credit reports. You get hounded for the payments.
And don't give me that baloney about young adults needing a credit card to build a good credit history or to learn to handle credit. Those are reasons that have been fed to you by the credit card companies. It's a self-serving argument. There's plenty of time for young people to get and use a credit card. They have a whole lifetime of buying now and paying later. Let them spend their younger years learning to live within the limitations of the cash they have.
Besides, there's little need to worry that they won't be able to establish a good credit history. With the sophistication of the automated credit-scoring system, it takes only about six months to create a credit history, according to Craig Watts, public affairs director at FICO, the company that produces the FICO credit scores.
To enable the three credit bureaus to calculate a person's credit score, the person's file at the agency needs to meet three conditions:
- You need a credit or loan account that is at least six months old. "This ensures that enough credit activity is available to produce a reliable credit-risk score," Watts said.
- You need a credit account that has been updated by the creditor at least once in the past six months. "This ensures that enough recent activity is available to produce a reliable score," Watts said. While the FICO score considers all the credit history on a credit report, it gives more weight to recent activity.
- Your credit file can't indicate you're deceased.
Worried about your child getting a job without a good credit history? Don't.
Most employers don't do a credit check. And even those who do pull a potential candidate's credit report are looking for signs that someone has been financially irresponsible. A new college graduate or young adult can easily explain the lack of an extensive credit history.
There are a few other provisions in the new law that make it harder for credit issuers to get their hooks into young people.
Issuers can't entice college students into applying for credit cards by offering them T-shirts or teddy bears. Gifts to college students in exchange for filling out a credit card application are prohibited.
Card issuers can't send prescreened offers to people under 21 unless the consumers have consented to receive these offers. The law bans card issuers from raising the credit limit on accounts held by a person under 21 unless the co-signer gives written permission for a higher limit.
Clearly the best part of this new law is the authority it gives the parents or guardians of young adults to keep them away from debt a little longer. Please exercise that power.
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