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Facebook new college frontier for credit card marketers
An analysis by University of South Carolina law professor Eboni Nelson provides a look at the effectiveness of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act) in protecting young adults. It appears in the April issue of the Banking & Financial Services Policy Report.
“The CARD Act’s provisions for young consumers have been a step in the right direction, but more action is needed to protect college-age adults,” Nelson said. “Card companies continue to see consumers who are under age 21 as a profitable market and, as a result, they strategically have found ways to solicit the college-age crowd, including through social media.”
Nelson, who researches and teaches consumer and higher-education law, found several aggressive marketing practices and lax eligibility requirements by credit card companies despite the protections put in place by the law.
That is not good news for young people who are amassing record student loan debt. In early March, the Federal Reserve Bank of New York released a report showing that Americans owe more on their student loans to the tune of $870 billion, compared with credit card debt of $693 billion.
Nelson said the CARD Act, administered by the new Consumer Financial Protection Bureau (CFPB), curbed a variety of predatory practices that had been commonplace on U.S. college campuses.
Those practices included sending unsolicited credit card offers to students, based on information that the companies got from credit reporting agencies. Financial institutions also set up tables for giving away hats, shirts and other items to entice students to complete applications, signed compensation agreements with colleges and/or alumni to obtain member lists and extended credit to young consumers who had no ability to pay it back.
Analyzing data from the financial industry, government and higher education and reviewing news reports, Nelson found that credit card companies restricted from some of these practices found new ways of targeting college-age students.
Banned from using credit information to find potential applicants, companies have turned to the mailing lists of colleges themselves and rewards and loyalty programs to find young borrowers, Nelson said.
Marketers, banned from “tabling” on campus, have relocated to nearby off-campus locations and online via social media, such as Facebook, where they are offering promotional items and discounts, along with reward points and promotional credit terms, she said. And colleges and alumni associations continue to enter into financial partnerships, although greater transparency and restrictions have led to fewer agreements, payments by issuers and new accounts.
A 2010 survey showed 76 percent of University of Houston students reporting having received a credit card offer since 2009.
Perhaps most disturbing of practices by card companies is letting college students use student loan proceeds as proof of independent income on credit card applications, Nelson said.
“The CARD Act stipulates that consumers under age 21 must show they can pay the bill themselves or must have a co-signer. However, it is unclear what resources can be used as current income. What this means is that savings accounts, allowances, stipends, grants, student loans and scholarships can be used,” Nelson said. “Also, the ability to pay only means the ability to pay the minimum monthly payments, which can be as low as $25. It doesn’t mean the ability to pay the total amount of the debt.”
In the University of Houston survey, nearly 30 percent of students who got a credit card said they used student loan proceeds as part of their income on the application. Nelson said that consumer advocates who have called for stronger eligibility requirements have been ignored.
Despite all the aggressive marketing to college-age students, the statistics have improved Nelson said. Since 2009, the number of college students who own credit cards has dropped, and their credit card balances have risen only slightly in comparison with previous years.
A survey by Gallup and Sallie Mae reported a 27 percent drop in the number of college students who own credit cards since 2009. Experian, a major credit reporting agency, shows credit card balances for 18- to 25-year-olds is growing at a slower pace: 0.4 percent in 2010, 2.4 percent in 2009, 12.3 percent 2008 and 13.3 percent in 2007.
“These numbers are encouraging,” said Nelson. “However, it is unclear whether they are a result of the CARD Act. A tightening credit market, a recession and a growing preference for debit cards may also have contributed. Regardless, over indebtedness continues to be a problem for many young consumers, and greater attention should be paid to protecting them.”