10/31/2012 4:30 PM ET|
Credit cards for college students?
Parents shouldn't give a child in college free rein with credit cards. But with careful supervision, students can learn to use them properly.
A new class of freshmen is settling into college life, with a new financial independence that often includes, for the first time, credit cards. A recent survey in the International Journal of Business and Social Science found that half of college students own four or more credit cards.
But should students' new lifestyle include credit cards?
Once upon a time, university quads were lined with folding tables piled with "free" Frisbees, T-shirts and water bottles given out in exchange for a credit card application. Just sign at the X.
"Typical college students make very attractive customers for credit card companies," said Leah Hampton, an accountant from Lexington, Ky. "Most college students think about the here and now and are not focused on their financial futures."
Today, thanks to 2009's Credit Card Accountability, Responsibility, and Disclosure (CARD) Act, students younger than 21 must now demonstrate financial capability or have a creditworthy co-signer to get a credit card. But the requirements are still lax.
"I've heard stories about students listing their student loan availability in the income section and getting approved," said Mitchell D. Weiss, who teaches a financial literacy course at the University of Hartford in Connecticut. "I've heard about students asking friends and relatives to co-sign."
Your college kid, in other words, can probably get a credit card if he or she wants one. And it may not be a terrible idea. Credit cards provide a backup plan for emergencies and allow students to build a credit history.
The question is: What can a parent do to mitigate the dangers -- the debt and bad credit scores -- that can haunt the student, and parents, for years after graduation?
One strategy is to arrange for a secured credit card, which is like a prepaid card but allows the students to establish "credit cred." (Make sure the bank that issues the card reports to a credit agency, so a credit history is created.)
Parents can also give the student an authorized card on one of their existing accounts, with certain safety measures in place. The student's card number should be different (in case it's compromised), and a maximum charge should be established.
For students 21 and older, Weiss recommends two credit cards: one for routine charges that are within a student's monthly budget and can be settled without carrying a balance, and a second card for emergency expenditures that may have to be carried. "That way, routine charges won't incur interest costs, and the emergency expenditures can be settled over a reasonable period of time," said Weiss.
Be aware of other cards your child may have, such as a debit cards that goes with his or her new checking account. Make sure the cards have overdraft protection as a safety net for those adjusting to the concept of balancing a budget.
Students also need to learn to protect their valuable new information. Marian Merritt, a Norton Internet safety advocate, points to unfamiliar Wi-Fi hot spots and unsecured dorm rooms as places where login credentials and banking transactions can be intercepted by hackers.
Your child's financial education, experts say, is like other steps to adulthood that parents need to attend to. According to a recent survey of more than 1,000 college students by the website CreditDonkey, only 63% said their parents helped them learn about managing their money, whereas 82% said their parents taught them to drive.
"Until more parents teach their kids about money, I recommend a graduated path from cash, prepaid, ATM, authorize, co-sign, secured, to unsecured credit cards," said Charles Tran, the founder of CreditDonkey.
Until the student "graduates" to an independent card, watch him or her carefully. Giving a student a credit card "doesn't mean they have unilateral control over their purchases," said Steven Trumble, the president and CEO of American Consumer Credit Counseling. "If the parents' money is involved, or a parent co-signed for the card, then the parent has every right to set limits. It's important for parents to monitor their kids' spending to make sure they're using the credit card responsibly, especially when they first go away to college."
"Also, students should keep up with their finances as carefully as they would their schoolwork," says Creditcard.com.
That presumes, maybe optimistically, that college students are paying sufficient attention to their studies. "If all else fails," Creditcard.com says, "they should use cash."
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One of my kids went to college near NY. When she started we gave her a credit card for emergencies and paid for extra meals on her meal card so that when we came to visit, we could eat at the cafeteria. We also paid her phone bill, all of her tuition and let her pay for her books because she had a job. Well, she used the credit card to take her friends out to Broadway shows and used the meal card to treat her visiting friends to meals at the cafeteria. I was floored as my husband and I had never been to a show on Broadway and had always been frugal in order to provide a college education for the kids. Funny but my daughter later married the world's greatest cheapskate and I'm sure he'll keep an eye on her spending.
I think people forget that credit cards is about borrowing money at big interest rates. How quickly that small debt can grow if only the minimum payment is made and how long it can take to pay it off.
Couple that with student loan debt and you put college kids on the road to poverty and bankruptcy before their first jobs. If you want to offer a better solution, open a checking account with a debit card and load the account with a certain amount. Make the student live within a budget. If he or she get's a part time job they have a good option for cashing checks and depositing money. Usually better then a cash checking store. Trying to instill a buy me now pay me later mentality in students might be good for retailers. But its not good for people's budgets. After all part of the recession was caused by people being far too much in debt and not able to even make minimum payments and defaulting.
This is not good because bankruptcies will follow you for a long time and prevent you from getting credit and even if you are granted credit the interest rate will be high.
I started my oldeest son (now 21) by getting him an AMEX card. They are individually numbered so I can track his expenses. He had a $500 monthly limit which I could lift if he needed to buy a big ticket item (laptop) and he would pay me upfront. This did a few things. First it helped him build credit he has a credit score of 750+. Second it helped him wash purchases through and get cash rewards and provided him buying security against bad/poor merchandise (had to return a PC from an online retailer and AMEX won the day). Finally, it got him used to the idea that this was a short term loan that had to be paid back completely every month.
He now has a pretty good job in the intelligence world and I'm sure the good credit score helped him when it came to his background investigation.
Number 2 son is on the same path and eventually my 14 year old daughter. TEACH YOUR KIDS ABOUT MONEY/CREDIT!
My middle son has been paying it off in total each time he charges. He just got a second credit card and I admit it makes me a little nervous. All his statements from both cards come to our house. Yes, I open them to make sure he is staying on top of things. So far so good.
My youngest starts college next year so we will have him apply for a credit card over the summer. He has been responsible with his debit card so hopefully that will carry over to a credit card. His older sibs also have had debit cards and have been fine.
We did stress to our children how important it is to use the cards properly. Don't use the card if you don't have enough money to pay it off immediately.
Not everyone who graduates college has student loan debt. Some even find jobs! These kids need to begin establishing credit. My daughter established credit with a small limit card and paid it off each month. She was able to buy her own car after college with no co-signer.
You can establish credit with something as minimal as a prepaid Visa card.
Maybe Dad can help. I gave my daughter a new card, explained fully about the limit, that it was interest-free on purchases for 18-months, not to exceed X-amount in any one given month on necessary purchases, and she can write the check and pay the balance to ZERO every month ...since she's home most weekends. A pretty easy labor of love.
She has always been frugal, smart and money-smart since 12.
I gave both of my boys American Express cards when they went to college. Neither boy abused the cards and both learned that the account had to be paid. I liked the AmEx card because the card requires payment each month. They learned that what is charged must be paid for. My youngest, accounting/finance/economics major resented the idea of paying interest and used his cash instead of the card.
So I think that giving them cards while in college was a good experience and it also gave them a source of emergency resources if they were needed.
My parents never trusted me enough to invest in me thanks to an extremely jealous sister, however the credit card companies do and im very grateful that they are giving me a chance at the American dream.
As long as the bills are paid or the balance is used to invest in some type of appreciating asset, credit cards are great tools. I'd suggest anyone reading this to own only no annual fee cards and cards that offer 0% interest for the first 12-18 months. These days there is little reason to pay any type of fee, or to get credit card deals that do not offer a year or more of 0% interest.
If someone takes advantage of credit cards and neglects to pay them. It's only an indication of their nature and they;ll have even more problems in life. They'll go into debt regardless of who or where it's from.
What the hell are you talking about: "kids gain financial independence" Is the writer of this article a luny or what? The only financial independence that College kids have is the financial independence that the parents allow them or the financial independence they achieve from working on their own. Next thing ya know, we will be asking kids for money. What a moron who wrote this article.
Just another thing the under 30 crowd in this country can't live without now it is credit. Cell phone glued to their hands 24/7, facebuggering telling everyone how special and cool they are. God forbid they get a job and pay for their own college instead of sucking the life out of the taxpayers. But they learned all this from their overindulgent parents and their union teachers who all they did was blow smoke up their asses for the last 18 years. Telling them how special and how fortunate the world was to have them. And the sad part is they will never pay this or their college loans back, 60$% or more(if barry get reelected ) will be back in their parent home with their worthless degrees lamenting the fact the world is so unfair to them. Well this is a key group that gave all of us barry in 08, hope they suffer and suffer.
My college student recently tried to get a credit card and was advised that without income-no credit card. I had to open a joint account using myself as primary. Credit history will build and in one year if she gets a part time job to have income then I can request to be removed from the card. That will show on my credit history that I am cancelling a credit line. A negative for me. She could not get a secured credit card if she could not show income either. It is not as easy as the article implies to get a student a credit card.
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