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Yera Dominguez charges the credit card of Reynaldo Rodriguez as he pays for items at Lorenzo's Italian Market, May 20 in Miami. Joe Raedle/Getty Images
The landmark credit-card legislation that President Barack Obama signed into law on May 22 offers a bevy of protections for card holders. It outlaws some of the industry's most contentious billing practices. Card companies, for instance, will no longer be able to raise interest rates on card holders' existing balances until the borrower is 60 days behind in payments. And it forces the companies to give customers ample notice—45 days—before jacking up rates.
The bill also addresses some of the worst abuses of credit-card use on campuses. Without a co-signer, full-time college students under 21 will be confined to what amounts to credit-card training wheels, with credit restricted to 20% of a student's income. The presence of a co-signer protects college students from sudden rate increases; under the new law, a student's co-signer has to approve any such hikes.
But the sweeping law, which takes effect in nine months, doesn't address every college credit-card controversy. Most notably it does little to address affinity-card contracts, which encourage colleges and universities to sell students' contact information to credit-card companies. These often confidential contracts bond hundreds of schools across the country with credit-card companies eager to sign up undergraduates. In some cases the school's financial reward increases handsomely when students frequently swipe their cards.
Students at the University of Michigan, for example, probably aren't aware that their e-mail addresses and contact information are worth a whopping $25.5 million. That's how much Bank of America (BAC) is paying the Michigan Alumni Assn. over an 11-year affinity-card contract to market school-branded plastic to students, alums, and sports fans. The Michigan Alumni Assn., which forged the deal, gets 0.5% of total purchases racked up on the school-branded cards. And the University of Michigan is hardly alone in inking a contract that rewards it for turning over students' personal information—precious leads in the hunt for new customers.
Such financial alliances, in which participating schools have an incentive to encourage credit-card use, raise questions about the role colleges should play in the credit-card debate. Should schools be entering into these agreements, encouraging students to amass often high-cost debt at a time when tuition costs have ballooned and growing numbers of students struggle to make ends meet? Roughly half of the nation's college students carry at least four cards in their wallets, shouldering an average of $3,173 in debt, according to Sallie Mae (SLM), the student lender that monitors college-debt levels.
College students aren't just swiping their cards to pick up pizza tabs or buy school-spirited sweatshirts. They are increasingly using them for such big-ticket items as college tuition. Just five years ago, 24% of students charged a portion of tuition to a credit card—a number that has grown to about 30%, according to Sallie Mae.
At the bill-signing ceremony, President Obama emphasized that the new law was aimed at upholding basic standards of fairness and accountability. He said that credit cards can be a valuable tool for consumers while he decried unfair billing practices that can transform credit cards from a "lifeline" to an "anchor." The bill is the first significant piece of legislation passed to rein in the credit-card industry in the past decade.
Under the law, banks won't be able to raise rates on outstanding balances until a card holder is 60 days late with a payment. Even if consumers pay late and become subject to a rate increase, there's an escape hatch: If they pay on time for the next six months, the card company must immediately restore the lower rate. The bill also eliminates fees for paying balances online.
More flexibility is built into the law as well. Credit-card companies now have to apply payments to that part of a consumer's debts that carries the highest interest rates.
Silver-Greenberg is a reporter for BusinessWeek.com.