Everyone has an opinion about credit cards. They’re great and they’re terrible and they’re everything in between, depending on whom you ask.
But one thing is certain: we adults have always had the right to apply for, open and use credit cards as we saw fit so long as we were old enough to sign a contract, which we can do when we’re 18. Thanks to some, we now no longer enjoy the privilege to make up our own minds on this matter.
Thanks to the Credit Card Accountability Responsibility Disclosure Act of 2009, or CARD Act, you can no longer open a credit card account until you’re 21 years old, unless you have a job or a co-signer. This is the law of the land since February 22 of this year.
The question is, was this the right move? How old should you have to be before you walk around with your very own credit card, no strings attached? What exactly was accomplished?
I’ve always found these age-based “forced avoidance” rules somewhat humorous and extremely nonsensical, especially when there is no scientific basis for the age cutoff.
It’s a statistical fact that drivers are higher insurance risks when they’re younger than 25, so many rental companies won’t rent to people in that age group — or would rent under more expensive terms. That rule makes sense, because it saves rental car companies money. Stipulated! But where is the evidence that supports that a 21-year old is a better manager of credit cards than an 18-, 19- or 20-year olds? You can stop looking because it doesn’t exist.
What does exist is a mountain of evidence why this provision of the CARD Act not only doesn’t make any sense but also is, in fact, problematic. Follow me…
“Avoidance” Doesn’t Equate to “Education”
I promise that no credit epiphany occurs at age 21. I know plenty of credit savvy 21 years old and even more credit disasters pushing 50. Proper credit management knows no age boundary yet someone felt it necessary to make you wait the three additional years to either be responsible or not.
There is also no new requirement to take a “Credit Cards 101” class in either high school or college, yet it’s hard to argue that it’s not more important than history, music, art, psychology or physical education.
Co-signing = BAD IDEA
This CARD Act actually allows a lender to issue you a credit card as long as your parent co-signs for you, regardless of your age or income. What this means is both of you would now be equally liable for the debt and equally at risk for credit damage if the card is mismanaged in any way.
For example, if your parent runs up a balance on the card, your credit will suffer — and vice versa. If you think your parent is making the payments on time, and they aren’t, your credit will suffer — and vice versa. If these things happen you (or your parent) won’t be able to simply change your mind about being on the account because the lender won’t let one of you jump off the liability train.
Lending 101 = Two liable parties is better than one liable party.
Additionally, if your parent has poor credit then you could very well be declined outright or saddled with adverse terms. So, the penalty for being under 21 could be a 29% interest rate on your revolving balances, thanks to mom or dad. And, because this is your initial interest rate, you can’t earn a better one by properly managing the account. The lender is under no obligation to adjust it downward, ever.
No, I think it’s safe to say that this was the legislative equivalent of “swing and a miss.” I get the hypothesis; you restrict credit card usage by young people and you prevent them from getting into debt. Nobody likes to see people in debt, let alone young people. But this isn’t going to prevent that from happening. It just delays it for three years.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and the author of the “credit history” definition on Wikipedia. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. He has served as a credit expert witness in more than 70 cases and has been qualified to testify in both Federal and State court on the topic of consumer credit.