Living with credit

Should college students have easier access to credit?

Kelly Dilworth

Guess who’s less likely to seriously default on a credit card: A 44-year-old who has been handling credit since before Ronald Reagan left office? Or a 19-year-old college student who wasn’t even born until well into the Clinton administration?

Surprisingly, it’s the college-age student, says a new study, calling into question the wisdom of the Credit CARD Act of 2009‘s restrictions on granting cards to the younger crowd.

The working paper from the Federal Reserve Bank of Richmond and Arizona State University found that Americans under the age of 21 are far less likely to own a card these days than they were before the law went into effect. (The CARD Act bars underage applicants from qualifying for a new card unless they can recruit an adult co-signer or prove they have enough income to pay their bills.)

Should college students have easier access to credit?

Consumer advocates say that the shrinking number of student cardholders is a clear sign that the law has been successful. However, researchers at Arizona State and the Federal Reserve Bank of Richmond aren’t as enthusiastic.

Instead, they say that the law’s restrictions on student cards could have unintended consequences over the long-term — particularly for students who need a card to help build a positive credit history.

“Letting students apply for credit cards may actually make sense,” argued Arizona State’s Andra Ghent in an Oct. 7 press release. “These students are the people who want credit, need to build up a good credit history and have a steeply sloped income profile. If they don’t have a student loan, then a credit card may be the only way they can establish a decent credit history.”

To help support her argument, Ghent points to the working paper that she and her colleagues at the Federal Reserve Bank of Richmond released earlier this summer. The study, based on credit report data from Equifax, found that young adults under the age of 21 are significantly less likely than older consumers to miss a payment by 60 days or more.

However, when they do miss a payment, they are also more likely than older cardholders to learn from their early mistakes and avoid missed payments in the future.

According to Ghent, limiting young people’s access to credit could crimp their ability to practice using credit at an early age and build good habits over the long-term. It may also unnecessarily squeeze young adults who need the extra funds to pay their bills and build a solid credit score.

“You can’t learn just by watching credit card use,” said Ghent in the release. “You have to get a card, pay it down every 30 days and experience in order to learn. It’s also hard to get a mortgage if you can’t get a credit card to build up your credit history,” she adds.

Ghent’s argument is provocative and is sure to get some push back from consumer advocates who say that the CARD Act’s restrictions on student credit is one of the law’s most important provisions.

Personally, I sympathize with recent grads who don’t have enough of a credit history to qualify for a loan with decent terms. However, I’m not sure that relaxing the application standards for students under the age of 21 is the right answer.

Ghent and her colleagues argue that they have yet to see any evidence showing that underage borrowers are more likely than others to seriously default on their bills.

However, even if students manage to pay their credit card bills on time, they could still be financially undermined by snowballing debt — especially if they’re also dealing with massive student loans.

After all, it doesn’t take much for a small credit card bill to rapidly balloon if you can’t afford to pay more than the minimum amount due. Students, for example, currently pay an average APR of about 13.7 percent on new cards. If a student borrows just $1,500 over the course of their studies and pays just the minimum amount due on a card with a 13.74 percent APR, they could wind up paying nearly half that amount in interest alone, according to’s minimum payment calculator.

That’s a steep price to pay for the sake of building up a solid credit history a few years earlier than you otherwise would. Some students may benefit from charging a few hundred dollars here and there and paying it off quickly before they graduate. However, if they can afford to pay their bills in full each month, then they probably have enough income coming in to qualify for a new card — even with the CARD Act’s restrictions.

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