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Andra Ghent

5 Things to Know: The CARD Act and Young Borrowers

by Andra Ghent Tuesday, May 16, 2017
Andra Ghent

Andra Ghent, associate professor of real estate and urban land economics. PHOTO: PAUL L. NEWBY II

Here’s a quick quiz to test your knowledge: What is the minimum age required in the United States to do the following activities?

  • Serve on jury duty
  • Vote in a U.S. general election
  • Apply for a credit card
You may have guessed age 18 for all three, but in the case of applying for a credit card, it’s not so cut-and-dried. Prior to the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), signed into legislation by former President Barack Obama, credit card representatives handing out pre-screened applications to 18-year-old college students on their way to class were a familiar sight on U.S. campuses.

Designed to protect consumers from exploitative practices like double billing cycles and hidden fees, the Act also specifically addressed policies regarding credit cards and young borrowers. Under Title 3, individuals under 21 cannot apply for cards without an adult cosigning or a proven means of significant and steady income. Title 3 also bans the distribution of card applications within 1,000 feet of any college campus, mail card offers, and other similar actions.

The legislation worked. As a gatekeeper to credit, the law reduced the number of young people getting cards. However, the consequences of the Act and how it affects those just starting out financially are considerably less clear. 

My recent research with co-authors Peter Debbaut, a graduate student at North Carolina State University, and Marianna Kudlyak, an economist at the Federal Reserve Bank of Richmond, looks at the Title 3 section of the CARD Act as it pertains to young borrowers.

We came away with three key findings: 1) After the Act was passed, individuals under the age of 21 are 15% less likely to have a credit card. 2) Individuals under 21 who already have a card have fewer cards. 3) Those under 21 are 35% more likely to have a cosigned card in the wake of the CARD Act. 

But we also uncovered many other details pertinent to the legislation and young borrowers. Here are five things to know: 

1) A lack of solid data. One of the main problems with the CARD Act is a lack of evidence to support the initial legislation. Media and sociology articles sensationalized the problem, making it seem like borrowers were defaulting at exorbitant rates. There was no hard data—benchmarks, age comparisons, age of first trouble—showing that individuals were getting into as many problems as lawmakers seemed to think they were. Originally, the Act was intended only for the under 18 set, which seems reasonable, but the age limit was changed at the last minute to 21. Part of the problem both before and after the CARD Act is that there’s just not a lot of information available about these young borrowers. 

2) Skepticism about capitalism. Voices like Robert Manning, author of Credit Card Nation, helped foster this idea that because corporations are involved, it’s automatically wrong. There were these attitudes of, “oh, look, they’re preying on our youth,” and “no one should be marketing to my student.” 

However, there was nothing predatory about these companies coming on campus. As a demographic, college students have future income prospects and are not high default risks. It’s worth noting as well how tiny the credit card limits were: rather than massive financial ruin, defaulting on them might be akin to defaulting on a car loan. 

3) Cards as a key source of credit. For the average American borrower without liquid savings, a credit card may be the only means of payment available to them when an adverse shock hits (e.g., car repair, medical bill). Lawmakers who fail to grasp this reality come off sounding paternalistic. If you’re a politician with a six-figure salary, a 14% interest rate may seem like a lot if you’ve never been in a situation where there’s no other option.

4) Targeted borrowers are better-than-average credit risks. Young borrowers are not bad borrowers. We found that early entrants into the credit card market are less likely to default and have higher credit scores later in life. Delinquency (late or missed monthly payments) also decreases as individuals gain more credit card experience.

We also found linkages between parents and the early credit card entry of their children. The parents of children who get a credit card by age 21 are less likely to have a serious default, are less credit-constrained, and tend to have higher credit scores. 

5) Default rates peak in middle age. Contrary to media hype, the highest default rates occur with middle-aged borrowers. While delinquency is more common in younger card users, credit card holders aged 35 to 44 are 10 percentage points more likely to default than individuals between 18 and 20 years of age.


There’s a positive correlation between opening a credit card early in life and stronger credit scores and credit history down the road. A delayed entry into the market, like the CARD Act mandates, means younger borrowers will inevitably start with lower credit scores and will pay more for credit at age 23 or 24 than they would have had they started earlier. And if individuals do make financial mistakes—which many will to some extent since personal finances can be a “learn by doing” endeavor—they’ll be making these mistakes with higher credit limits and a potentially greater negative impact.

Instead of blocking young borrowers from the market, perhaps lawmakers might better serve their 18 to 21-year-old constituents by letting them become (plastic) card-carrying members of society earlier, with the freedom to make financial decisions for themselves like everyone else. Advocating reduced credit card usage across the general consumer population is one thing; taking a “no 20-year-olds” stance with little pre-legislation fact-finding or research-based evidence is quite another. The jury is still out on what the welfare consequences of this Act really are. 


Read the paper "The CARD Act and Young Borrowers: The Effects and the Affected" published by Journal of Money, Credit and Banking.

Andra Ghent is an associate professor and the Lorin and Marjorie Tiefenthaler Professor in Real Estate in the Department of Real Estate and Urban Land Economics.