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Post-CARD Act, Banks Shift to Prepaid on Campus
A study on college credit card use from the International Journal of Business and Social Science, released this month, refers to student borrowing habits as a “disaster,” and rightly so. Student credit card debt, to say nothing about student loan debt, “snowballed in the last decade” — jumping from an average of $946 to a staggering $4100. Fortunately however, the research took an astonishingly long time to get done — the data was collected in fall 2009 and published just this month. A lot has changed since then.

In the two and half years between data collection and publishing of the report, the CARD Act of 2009 went into effect, in early 2010, making it substantially more difficult for anyone under 21 to get a credit card. Thanks to the new law, minors need a parental co-signer or proof of income to get a credit card now, and lenders can’t give away free pizza to get 18-year-olds to sign up for credit cards they hardly understand. Based on MyBankTracker’s research into the matter, it would appear that students have, indeed, lowered their carried balances on credit cards.

But the study‘s findings about students’ collective ignorance of how financial products work was galling. About 90 percent of respondents carry a balance, and only about 14 percent knew what their interest rate was. Overall, just 10 percent of students in the study knew all three key factors about their credit cards: interest rate, late fees, and the penalties for going over balance. The implication is clear: young people had no clue what they were doing with these financial products, and banks were raking it in. That is, if they could ever collect.

Relatedly, it says nothing of students’ understanding of how credit scoring works, but one imagines it might be similarly disheartening.

So perhaps it should be considered good news, from the Wall Street Journal, that banks have resorted to issuing prepaid cards on campus instead. According to the story, “several lenders have begun offering prepaid cards that double as a student’s campus ID card.” Specifically, U.S. Bank has teamed up with North Carolina State University to create something called the “Wolfpack One Card,” reports the Journal. The card will be offered to all incoming freshmen this upcoming school year. It has no monthly or activation fees, but the card does charge $2 for non-U.S. Bank ATM withdrawals.

Consideration of whether one thinks it’s ethical for a public university to hold students captive to a private bank aside, this is mostly good news. If students will have the ability to make electronic payments from the day they set foot on campus, credit cards will look a lot less appealing, especially considering how difficult they are to come by.

Prepaid use has gained ground among young people recently, perhaps as a result of these regulatory changes. It presents both a crisis and an opportunity for banks. Prepaid cards are a tougher sell — give us money and we’ll charge you money to let you use your money — than credit cards — we’ll give you money and charge you money for using our money. However, they make for more financially responsible customers — and, arguably, banks.

Using prepaid as a strategy for hooking young customers appears to be a wise strategy for banks, or at least their only strategy left for bringing young people into their world in a post-CARD Act, post-financial collapse environment.

Young people are saddled by enough debt after college as it is. The total outstanding student debt balance passed $1 trillion earlier this year. And banks don’t need more customers with their financial history so thoroughly ravaged. Both stand to benefit from a more honest, straightforward relationship. What went on in the last decade could not have continued, and it appears banks have been forced to learn their lesson with regard to young people.

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