Photo (cc) by DAEllis
Editor’s note: This post comes from partner site LowCards.com.
It is almost time for your high school graduate to leave for college. Talking with your son or daughter about budgets, credit cards, and the dangers of debt should be part of the preparation in sending them off into life on their own.
“Credit cards represent freedom and independence for college students, especially that first year when living away from home is new and exciting. The more they understand about the correct use of credit and its consequences, the more responsibly they can handle it,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. “Money management is not a skill they should learn from their friends or by making mistakes.”
What Has Changed
As of February 22, the CARD Act began limiting credit options for students under the age of 21. While the regulations protect students from aggressive credit card marketing on campus, the law also restricts credit availability for students. If you are under 21 and want to open a credit card account, you will need to show you are financially able to make payments, or you will need a co-signer.
There are many benefits but also some potentially harmful side effects to these regulations. Parents can have more control and more influence over their students’ finances. These strict application requirements will reduce the number of college students with credit cards and credit card debt. But the law also eliminates the opportunity for responsible students to begin building a good credit score at a young age.
Before the CARD Act, it was very easy for college students to get a credit card. Issuers wanted to build brand loyalty early and if students got into debt, the parents typically bailed them out. This also gave responsible students a chance to build a good credit score while they were in college. Today, if college students can’t get a credit card while in school, it limits their ability to start building their credit score. While the credit score may not matter in college, it will matter immediately after graduation. Lenders, employers, and even apartment managers use credit scores to help make judgments about the applicant. A low or non-existent credit score could mean higher rates for loans or even a missed job opportunity.
Payment Options for Students Under 21
- Credit cards. Students under the age of 21 can get a credit card if he or she has a co-signer or has proof of the ability to make payments. Co-signing should only be an option if your student can use a credit card responsibly. If the student makes a late payment, it also shows up on the co-signer’s credit report. If the student can’t pay off the debt, the co-signer is responsible for all the debt.As a co-signer, you will also receive a monthly statement. Credit limits can’t be increased without your approval. It is advisable to “opt-out” for over-the-limit coverage; then, any charge that puts your account over the limit will not be accepted. This avoids costly over-the-limit fees. Sign up for online account alerts. You can receive a text or email when a payment is due, and if there is irregular activity in the account.”Students can also get a credit card if they have a job and can afford the payments. Credit card issuers give very little guidance in their terms and conditions about minimum income requirements or how they verify income,” says Hardekopf. “The definition of income also varies by issuer. Some include stipends, grants, and scholarships as income.”
- Debit Cards. These cards are tied to checking accounts. Opt-out of overdraft coverage to avoid overdraft fees. Online account alerts can notify you when the account falls below a specified balance. Debit cards do not help build credit scores and there may not be a sufficient balance during an emergency.
- Prepaid Cards. These can be purchased anywhere, even grocery stores. However, they also have fees, so read the fine print before you purchase.
- Secured Cards. These cards have more fees and the interest rate is high, so pay it off each month. But secured cards are relatively easy for anyone to get because it is secured by a prepaid deposit. Make sure that the card reports to a credit agency. Secured cards from Orchard Bank and Public Savings Bank both report to credit agencies.
Credit Card Stats for College Students
According to a Sallie Mae study, 84% of college students had at least one credit card in 2009, up from 76% in 2004. The average amount of debt carried by college cardholders is $3,173 which represents a 46% increase over the 2004 figure of $2,169. The average number of cards per student is 4.6. Only 17% pay off their entire balance each month and 22% make just the minimum payment.
Even though these numbers should drop because of the CARD Act, they still show the importance of talking with your students before they get into debt. The CARD Act does not remove this responsibility from parents.
Talk With Your Student About Credit Card Debt
Parents should teach their student how to budget, spend wisely, and use credit. Start with your own credit card bill and use it to explain interest rates, grace periods, and minimum payment. Explain the high rates of cash advances and how to avoid these loans. Show them examples of how much they will pay in interest by only making the minimum payments. Tell them about the fees and penalty rates. Use online payment with reminders to help avoid late payment. Teach them to monitor their credit limit and if you must carry a balance, keep it under 30% of your credit limit.
Make it clear that credit cards are loans that have to be repaid in full each month. If you can’t afford to pay for the item with cash, then you can’t afford the item. Tell them what is a good time to use a credit card for payment (textbooks, emergencies) and what isn’t (clothing, food, entertainment).
Teach them that credit scores will be nearly as important as test scores. Show them a copy of your own credit report and use that as an example of building a good (or bad) payment history with credit cards. They can even review their credit report for free each year to check their progress at annualcreditreport.com.
Give advice on how to avoid credit card theft and what to do if your card or identity is stolen. Don’t let anyone else use your card.