Credit Card Accountability Responsibility and Disclosure Act of 2009: Helpful for 18- to 21-Year-Olds?

ABSTRACT The Credit Card Accountability Responsibility and Disclosure Act of 2009 went into effect April 30, 2010, making it unlawful for a credit card company to sign up an individual under the age of 21 without an adult co-signer, unless that underage individual shows convincing documentation of a means to make adequate payments. The apparent concern is that financial institutions exercise a greater degree of influence over the spending and possible card debt of this younger cohort by providing lines of credit. The purpose of this paper is to test whether college students between the ages of 18 and 21, v. students age 21 and older, will accept or decline a free additional line of credit. Of those who would accept a credit line extension, the paper studies how students would use the additional credit line, if at all. These students already had experience with using credit cards; they were surveyed before the new law went into effect. This study supports the concept that students under the age of 21, through their choices, may be indirectly signaling that they would benefit from controls on credit lines, although not necessarily in the form of legislation, to limit the accumulation of additional debt. A significantly larger number of students under the age of 21 reject an offered line of credit, and the difference in the number rejecting the line increases when the amount increases from $500 to $1,000. Of those accepting the line of credit, a significantly larger number of students under the age of 21 plan to hold the card, not spend with it, in both the $500 and the $1,000 credit extension scenarios - but most do ultimately plan to spend some of the additional credit line. The conclusions are useful for bankers, legislators, academic professionals and students. It affirms (weakly) Congress' restriction of credit to students between the ages of 18 and 21 years. The findings may also impact the decisions made by government educational boards and academic administrators, whose goal should be to ensure that college students have enough cashflow, but not overextend their debt. Key Words: Credit, Behavioral Economics, Emerging Adolescents INTRODUCTION The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CCARD Act) went into effect April 30, 2010 (Library of Congress, 2009). This law, among other provisions, makes it unlawful for financial companies to sign up individuals under age 21 without an adult co-signer, unless the underage individual provides documentation of a means to make sufficient payments. This provision is meant to protect young adults from assuming more debt than they can pay. This study explores whether decisions of college students under age 2 1 behave differently from older students when offered higher lines of credit. Past research has documented young adults' credit habits and their income growth potential but has shed little light on responses to additional credit access or credit use. This paper examines whether students, under and over the age of 21, would accept additional credit lines and, if so, how these two groups would use it. The survey was conducted shortly before the 2010 law change, shedding light on whether students under age 21 engage in different credit card behavior. This study provides evidence on the usefulness of the CCARD Act. Banks can use this information in marketing to students; and legislators can use this information to better understand younger, less experienced consumers. LITERATURE REVIEW Many of the approximately 5.8 million college students throughout the country are repeatedly offered credit cards (Warwick and Mansfield, 2000). They typically are low income producers, but they have discretionary income and expect to earn high incomes in the future. Card issuers anticipate that students will frequently use their cards and carry high outstanding balances (Ericson, 2002). Psychology literature supports differences between younger and older adults. …