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Over the past few years, there have been a vast number of developments in financial policies. Many of these policies were formulated to help improve the financial health of the general American consumer by making it easier to access the necessary information to make better decisions. Other regulations have made it more difficult for people to make the same old mistakes, and furthermore more difficult for credit card companies to take advantage of uninformed consumers.
Accountability, Responsibility & Disclosure Act
One fine example of this pertains to the new Credit Card Accountability, Responsibility, and Disclosure Act, or the Credit CARD Act of 2009, which has a brand new stipulation that makes it more difficult to acquire any kind of credit between the ages of 18 and 21. If you want credit, you have to have an "independent means of repaying any obligations," or the signature of a willing co-signer who is at least 21 years of age and has this "independent means." This is not simply only designed to prevent young people from misusing credit, though it should help in that regard. It is also a safety precaution that helps reduce predatory lending practices to college students and other young people who might not have a high-paying job and therefore no ability to make consistent payments.
These rules apply to all credit cards, even those that are secured. Betty Riess, spokeswoman for Bank of America scribed online: "We do offer a secured card and the same rules apply to young adults under 21 that we have on the unsecured card. If the adult applicant meets the ability-to-pay criteria, they will not require a cosigner. If the applicant does not meet that criteria, we would require a co-signer."
Can you pay your bills or not?
Of course, this begs the question: how does a bank or other financial lending institution know whether or not you can pay your bills? To answer this question, the Federal Reserve Board approved another rule that laid out more specifically how this is determined. First of all, the consumer must disclose their income or assets to prove that they are able to make payments. They must also disclose any other debt obligations that could become a liability. This information can also be taken from a credit report if necessary. The issuer then considers the income to debt ratio, liabilities to assets ratio, and the net income left to the consumer after making their payments. This applies for anyone who is of the legal age to possess a card, but the ability-to-pay stipulation may be different depending on the card issuer, so you should make sure you have all the information before moving forward.
Secured Credit Cards
Secured credit cards are designed to grant access to credit to less-than-qualified consumers. Whether you are new to credit or trying to rebuild your history, you can usually find a secured card that allows you to put a security deposit down on the card which then grants you approval. This security deposit is not intended to pay down your balance and only acts as a kind of retainer. If you can't afford to make payments or you default, the issuer keeps your deposit.
While you might think that this security deposit could count towards your ability to pay requirement it does not. There are a couple of reasons why this is so. First of all, secured cards have varying amounts and not every card is limited by their security deposit. In fact it is very common for a card with a $300 security deposit to also feature a credit line of $500 or more. Obviously, you cannot simply apply portions of your security deposit to the total balance. Secondly, secured cards behave just like regular credit cards. This means they have the same interest rates and fees. Therefore, neither can you apply your deposit towards the payment of your fees. No, your security deposit is not an "income," that will ensure your continued prompt payments. Besides, you get the deposit back once you close the card, so you certainly couldn't apply it to your balance in that regard either.
If you are really concerned
If you are truly concerned about building a solid base for credit, you might want to consider becoming an authorized user on a parent's account. With your name on their account, their good credit behavior helps yours as well, and you don't have to do anything to get it! At the same time, there are also some cons to this strategy, but it really depends on how good your parents are with their credit.
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