Credit cards will become tougher to get for young adults
By Cara Henis
As the clock winds down on an era of easy credit card access for youths, young adults must find new ways to develop positive credit histories.
After February 2010, adults younger than 21 may only obtain a credit card if they can demonstrate financial independence or get a parent to co-sign and take responsibility for payment if the young adult fails to do so. These new requirements are part of the Credit CARD Act of 2009. a nationwide reform aimed at instituting more consumer protections.
While access to credit shrinks for young adults, there remains a growing need for young people to prove financial responsibility by demonstrating a history of faithful payments, says Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling, a national network of nonprofit credit counseling agencies. Ever-cautious lenders that control access to car, credit and housing loans, want to ensure their borrowers are safe investments, and do so by checking consumers' credit and payment histories.
"I would like to see students graduate with big and positive credit files," says Cunningham. "If they want to get rid of that old clunker and get a newer vehicle, they will have an easier time doing so if they have a bigger credit file. It's the same with getting a house and landing that dream job."
In fact, an increasing number of employers are looking at a potential employee's credit history before extending a job offer, she adds.
Since young adults who choose full-time jobs instead of attending college will more likely be able to qualify for credit cards, students under 21 will more likely face a difficult climb toward respectable credit records.
The Federal Reserve recently released rules outlining what form of proof is needed to determine how a person qualifies as financially independent. "The Board believes an evaluation of a consumer's current ability to pay must include a review of the consumer's income or assets as well as the consumer's current obligations," says the Fed.
Here are some alternative ways for students to build a credit
Piggybacking. Piggybacking is when a student becomes an authorized user on a parent's credit card account. Students receive their own cards and may use them, but have no legal responsibility to pay. All charges, no matter who made them, are the ultimate responsibility of the primary account holder.
When the card company reports the payment and account status to the credit bureaus, both the student's and the parent's credit reports reflect that activity. If students abuse their card-carrying power by overcharging, the parent can revoke their access to the account. Potential problems can arise if the parent's credit begins to deteriorate. In that situation, both the parent and the child receive a negative report.
Co-signing with a parent. Getting a parent to co-sign on a credit card is the alternative credit-building method proposed by the CARD Act. This is when a parent agrees to assume responsibility for any card debt accumulated by the student. The student receives all bills -- though the parent can request copies of the monthly statements -- and is expected to be the primary person responsible for the account. However, if the young adult becomes unable to pay on the account, the responsibility to pay then falls to the co-signer. Both are legally responsible for resolving the debt. If the co-signer can't pay, both their credit reports will be blemished.
A late payment by the student also negatively affects both parent and child. The amount of control a parent has over the account is minimal. Co-signers do not have authority to close the account if their student overspends because they do not own the account -- the student does.
"They may address the lender and attempt to withdraw their guarantee," says Dave Jones, president of the Association of Independent Consumer Credit Counseling Agencies, a national nonprofit organization involved in credit counseling services. "There is no assurance that this will be successful (especially if there is an existing balance). If they want to make their withdrawal certain, they will likely have to engage legal counsel."
A less risky alternative to co-signing is to add a child as an authorized user to one's account.