Will Credit Card Laws Help Reduce ID Theft for Young Consumers?

Franklin Winston, a 19-year-old freshman, arrived on campus to attend a college orientation program. He learned a lot, but the college missed an important subject: how to manage credit cards. Franklin’s ignorance would cost him dearly in time, money, and reputation.  

He later stopped by a table in the student union offering a free T-shirt to any student applying for a credit card. Franklin got both. His orientation packet also included an application for another credit card, which he filled out because the card was sponsored by the college and it would include its imprinted logo.

Eventually he obtained two more credit cards and used them throughout the year to pay for his bills plus items he purchased on the Internet. But Franklin was careless. Sometimes he left the cards or monthly statements on the desk in his dorm room. And he casually tossed the applications he periodically received in the mail for “pre-approved” credit cards into his wastepaper basket where they sat for several weeks before ending up in a campus dumpster. 

When he finally noticed several hundred dollars of unsubstantiated charges on two of his credit card statements, he realized he had become a victim of identity theft. He wasn’t out any money, but he had to spend many hours trying to untangle the mess with the credit card companies, and his credit rating was shot.  

This identity theft case is fictional, but it mirrors cases for many individuals, especially those in the 29-and-under age group who have too many credit cards, which increases the potential for identity theft. Sandra Block, who writes the “Your Money” column for USA Today, reported on Sept. 9, 2009, that 84 percent of college students owned a credit card in 2008, with 50 percent having four or more. 

In my last column, I provided data from the Federal Trade Commission’s (FTC) 2008 Consumer Sentinel Network Data Book. The “19-and-under” and “20-29” age groups for the years 2006 through 2008, on average, accounted for 7 percent and 24 percent, respectively, of the complaints. Credit card fraud involving identity theft ranged between 20 percent and 25 percent of the total complaints reported for the period.  

Credit card issuers are particularly aggressive on most campuses in promoting their services, and many of them induce students to apply by offering gifts such as T-shirts and iPods. Too many college students fill their wallets with unneeded credit cards, which results in monthly credit card statements and yet more “pre-approved” credit card applications in the mail. Students are easy targets for identity thieves. 

CREDIT CARD ACT OF 2009 

On May 22, 2009, President Barack Obama signed into law the Credit Card Act of 2009 (CCA), which will go into effect in February. Congress passed the bill because it wanted to provide some protection for young consumers (especially college students) and amend various sections of the Truth in Lending Act. I’ll analyze CCA’s potential to reduce identity theft for young consumers.  

Section 301: Protection of Young Consumers  

This section addresses the “extension of credit to young consumers” and is intended to protect anyone under the age of 21 by severely limiting the number of credit cards issued to them. The section reads: 

No credit card may be issued to, or open end consumer credit plan established by or on behalf of, a consumer who has not attained the age of 21, unless the consumer has submitted a written application to the card issuer (that includes) the signature of a co-signer, including the parent, legal guardian, spouse, or any other individual who has attained the age of 21 having a means to repay debts incurred by the consumer in connection with the account, indicating joint liability for debts incurred by the consumer in connection with the account before the consumer has attained the age of 21; or submission by the consumer of financial information, including through an application, indicating an independent means of repaying any obligation arising from the proposed extension of credit in connection with the account. 

Section 301 has the potential to significantly limit the number of credit cards issued to consumers in the “under-21” age group. Parents should be especially pleased because they’ll be able to help control their financial risk by restricting the number of credit cards their underage sons and daughters obtain. Also, young people who can’t find co-signers will find it difficult to obtain credit cards on their own because they’ll be unable to provide the financial information needed to establish an independent means of repaying any obligations resulting from the use of cards. 

Section 302: Protection of Young Consumers from Prescreened Credit Offers  

In its 2008 report, the FTC noted that credit card fraud related to new accounts accounted for 12.3 percent of the consumer complaints, most of which were related to prescreened credit card offers. The three major credit card agencies sell lists of names and addresses of “preapproved” consumers to credit card issuers who, in turn, flood our mailboxes with unsolicited offers to apply for their cards. Many identity thieves steal these offers from mailboxes, garbage cans, and dumpsters.  

Congress hopes to reduce the number of pre-screened credit offers sent to consumers under the age of 21 by preventing credit card bureaus from selling to card issuers the names and addresses of pre-approved consumers in that age group to card issuers unless consumers’ ages aren’t noted on their credit reports or if they consent to solicitation. To avoid receiving these solicitations, consumers under the age of 21 who have credit cards should either contact all three major credit card bureaus to make sure their ages are on their credit reports or, as mentioned in the last column, opt out of pre-approved credit offers by calling 1-888-567-8688 or visiting www.optoutprescreen.com.  

Section 303: Issuance of Credit Cards to Certain College Students  

Many college students who apply for extensions of credit lines on their credit cards eventually get over-extended, which can lead to missed and late payments, an expansion of debt, and possible increased risk of identity theft because of extra purchasing. Their credit histories nosedive, and some of them eventually drop out of school to work to pay off their accounts.  

Section 303 states that: 

No increase may be made in the amount of credit authorized to be extended under a credit card account for which a parent, legal guardian, or spouse of the consumer, or any other individual has assumed joint liability for debts incurred by the consumer in connection with the account before the consumer attains the age of 21, unless that parent, guardian, or spouse approves in writing, and assumes joint liability for, such increase. 

Section 303 has the potential to significantly limit the credit lines on young consumers’ credit cards, which will result in reduced card activity, promote financial responsibility, and reduce the risk of identity theft and unapproved charges on stolen cards that are maxed out. Also, having less credit card debt will increase the probability of paying off the account balance each month, which will help to enhance one’s credit history and limit the financial liability of co-signers.  

Section 304: Privacy Protections for College Students  

Section 304 attempts to provide some credit card privacy protections for college students. The section: 

• Requires public disclosure by a college and card issuer of any contract with the card issuer for marketing a credit card to students  

• Prohibits any card issuer or creditor of offering a student any tangible item as an inducement to apply for a credit card on or near campus or at an event sponsored by or related to an institution of higher learning 

• Asks universities and colleges to consider 1) adopting policies requiring card issuers to limit the locations where they will market and tell school officials where and when they will market their cards on campus and 2) offering debt education and counseling sessions as a regular part of any orientation program for new students. 

Without the inducements, many college students won’t be tempted to apply for additional credit cards, which might eventually limit the number in their possession and lessen identity theft.  

Recommending that schools offer credit card and debt education and counseling is probably one of the most important parts of this new law, but it would reduce identity theft more if these programs were mandated rather than merely “considered.” Also, the counseling should include a major segment on identity theft prevention. Such programs are equally important at the high school level because many of these students won’t attend an institution of higher education. Our youthful consumers need to know how to safeguard their personal information and understand how they can detect and prevent identity theft so they’ll reduce the probability of becoming victims. I believe this is the main key to reduce the overall level of identity theft. 

Section 305: College Credit Card Agreements  

Credit card companies partner with universities and colleges to promote “affinity” credit cards, which benefit both entities financially. Students are generally receptive to applying for these types of cards because they’re often loyal to their colleges. This section of the law says that credit card companies must submit details on all aspects of the financial agreements in these partnerships to the Federal Reserve Board, which, in turn will issue a report to Congress about college card agreements. This information must also be made available to the public. 

The U.S. comptroller general will periodically review the mandated reports and the card issuers’ marketing practices to determine the effect that college affinity card agreements and other college card agreements have on credit card debt. Through these periodic reports, Congress and the comptroller general will track student credit card activity at institutions of higher education and amend the Credit Card Act of 2009 when needed. 

MORE HELP FOR THE COMMUNITY 

We should all be pleased that Congress has passed a bill that might have a positive effect on reducing identity theft for our young consumers. 

We’ll have to wait until the FTC issues the 2010 Consumer Sentinel Network Data Book in early 2011 to see the impact of the Credit Card Act of 2009, but I believe there will be a minimal initial positive impact at best.  

Any significant positive changes will occur only because of mandated identity theft detection and prevention programs for high school and higher education students.  

If we can educate our young citizens at these levels, they can carry the knowledge throughout their lives, which should make a significant dent in identity theft activity. Unfortunately, this act doesn’t provide that mandate.  

As I mentioned in my last column, CFE members can help develop comprehensive identity theft prevention programs and deliver them to our young consumers as outreach services. I’m developing such a program with the help of the students in my fraud examination class. I’ll have more information in future columns. Stay tuned! 

Robert E. Holtfreter, Ph.D., CFE, is distinguished professor of accounting and research at Central Washington University in Ellensburg, Wash.