By Ylan Q. Mui
Friday, August 27, 2010; 12:10 AM
Credit card reform came too late for 20-year-old Tamaira Shaw.
The junior at the University of the District of Columbia got a preapproved credit card from Bank of America in the mail her freshman year of college. It had her name on it and a $500 limit, and she took it as a license to spend. Within three days, she bought a cellphone, clothes and textbooks - and maxed out her card. Her mother is still helping her pay off the balance - plus hundreds of dollars in finance charges and fees.
"They randomly sent it to me," Shaw recalled this week as she started another semester at UDC. "I was just excited."
The landmark federal legislation that overhauled the credit card industry is reaching into college campuses to protect students like Shaw as they return to school and attempt to juggle not only their education and social lives but also how to pay for it all.
The law, which was passed in 2009 and phased in this year, bans issuers from providing credit cards to people younger than 21 unless another adult co-signs for it or the student can show an independent source of income. It also prohibits the companies from offering students freebies, such as T-shirts or pizza, in exchange for signing up for a card on campus or at school events, and college groups are required to make public any partnerships they have with card issuers.
Consumer advocates have long criticized the industry for wooing young people who often don't realize the risks involved, sucking them into a vicious cycle of debt. "Their goal is to hook you on credit," Ed Mierzwinski, consumer program director of the advocacy group U.S. PIRG, said of the industry's business model.
The new credit card law was designed to target what lawmakers dubbed "unfair or deceptive" practices by issuers and implemented the most sweeping change in the history of the industry. Among the most aggressive provisions were banning interest rate increases on existing balances and prohibiting issuers from raising rates when their customers miss payments on an unrelated account, such as a mortgage or an electric bill. The final phase of the law, which took effect Sunday, limits penalty fees and requires gift cards to be honored for five years.
The legislation spells out unique protections for young consumers, an attractive market for card companies seeking to grow their business. According to the student loan company Sallie Mae, about 42 percent of college students have a credit card. In 2008, the most recent data available, college students graduated with an average credit card debt of more than $4,100, up from $2,900 four years earlier. And only 15 percent of freshmen had a zero credit card balance, plummeting from 69 percent in 2004, Sallie Mae said.
"If you were a student and you could fog a mirror, you could get a credit card," said Adam Levin, co-founder of Credit.com and former director of the New Jersey Division of Consumer Affairs.
Many students use credit cards for legitimate reasons, such as buying textbooks and meals or building a credit history. But lawmakers and consumer groups have attacked issuers for inappropriately marketing to students by holding giveaways on campus, mining alumni association databases and negotiating lucrative partnerships to provide university-branded credit cards. Several large issuers have been dialing back their promotions. Chase said it stopped using student mailing lists in 2006 and ended marketing on campuses and at athletic events by 2008.
Bank of America said it no longer sets up marketing tables at colleges, but it still maintains partnerships with about 700 alumni associations, athletic departments and some Greek organizations to offer college-branded credit cards to recent graduates. For example, it has a $2.8 million, seven-year contract with the Georgetown Alumni Association and its student credit union, which gives it access to the groups' mailing lists and pays a $50,000 bonus if the bank signs up 1,800 accounts in a year. On its Web site, the alumni association says the contract helps students because it pays for reunions, grants and scholarships, as well as a Sept. 11 memorial garden. The contract bans on-campus marketing and limits the number of direct-mail and e-mail campaigns.
Other Washington area universities, including Catholic University and Howard University, have similar agreements. A spokeswoman for Howard said the school is renegotiating a credit card contract with its alumni affairs department to ensure that students do not take on unnecessary debt, but she declined to elaborate. The college has also launched two financial-literacy programs for students, she said.
Under the new law, card issuers must submit any contracts they have with collegiate groups to the Federal Reserve, which will compile a report detailing the nature of the relationship. A Fed representative said the central bank is reviewing more than 1,000 agreements. Consumer advocates said they hope the legislation will increase transparency for such partnerships.
Still, sometimes even the strictest oversight cannot stop students from making mistakes.
Melanie Mirowitz, 21, a senior at American University, said she got a credit card with the blessing of her parents. They thought it would be a good idea to help build her credit history - as long as she used the card responsibly, she said. But paying the bill slipped her mind for a few months, and she racked up $500 in penalty fees.
"That wasn't a good conversation," said Mirowitz, who now tries to pay her balance on time each month. "They don't really explain it to you how it impacts you."
AU law student Steve vonBerg, 30, said his credit card initiation occurred shortly after he graduated from college. He racked up $7,000 in debt to fund a start-up business, which eventually shut down. It took him four years to pay off the card, he said.
Now older and wiser, he offered this advice to the new crop of students learning to juggle their budgets: "Don't take it into bars with you. Realize it's not free money."