Because of the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, the process of getting a credit card is going to drastically change for people under 21 years of age. Starting on February of 2010, people under 21 will not be allowed to get a credit card without a co-signer or proof that they can repay their credit card debt. At Wallet Blog we have already made it clear that this part of the credit card law is completely unfair and ridiculous as it singles out people under 21 years of age for special treatment, even though they are legally adults.
No matter what politicians decide, credit history is going to continue being a critical factor in determining loan amounts and loan interest rates (as it should be). However, since it is now harder for people under 21 to get credit cards, they will have less time to build up their credit history and will be at a disadvantage for anything that requires a credit check (like getting a loan or even renting an apartment).
As a result, we suspect that because of this new law we will see a trend of younger consumers gravitating towards secured credit cards. Secured credit cards act just like regular credit cards except that they require a security deposit equal to the card’s limit. In that way, if the consumer defaults, the credit card company simply takes the deposit in payment. Thus, the deposit automatically acts as proof that the consumer has the ability to repay their credit card debt. Moreover, because the secured card behaves, in all other ways, exactly like a regular credit card, by paying bills on time, the consumer is able to build up a positive credit history.
Secured credit cards will allow younger consumers to avoid the paperwork and regulation that is required to get unsecured credit cards. They will not, for instance, need a parent or legal guardian to cosign or provide proof of income. In addition, as the card can be used anywhere that MasterCard or VISA is accepted, secured credit cards will help younger consumers to make purchases online and in venues where a credit card is an absolute must.
Ultimately, our position at Wallet Blog is that it is unfortunate that people under 21 are treated differently by this law than their older peers. Credit history is just as important under the new law as it was prior to this law. We feel, however, that younger consumers will deal with the restriction of the new law by making secured credit cards the new student credit cards.
Disclosure: Some of the links point to CardHub.com, which is owned by the same parent company as this blog.