A new class of freshmen is settling into
college life, and 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, a CPA from Lexington, Kentucky. “Most
college students think about the here and now, and are not focused on
their financial futures.”
Today, thanks to 2009’s CARD Act,
students must now demonstrate financial capability or have a
creditworthy co-signer in order 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
cosign."
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 which allows the students to establish “credit-creds.”
(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 the parent's existing
account, 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 over age 21, 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, like debit cards that go with
his or her new checking account. Make sure they set up 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 hotspots 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 parents need to attend to. According to a recent survey
of more than 1,000 college students by CreditDonkey.com, only 63
percent said their parents helped them learn about managing their money,
whereas 82 percent taught them how to drive.
“Until
more parents teach their kids about money, I recommend a graduated path
from cash, prepaid, ATM, authorize, cosign, secured, to unsecured
credit cards,” said Charles Tran, founder of CreditDonkey.
Until
the student "graduates" to an independent card, watch them carefully.
Giving a student a credit card “doesn’t mean they have unilateral
control over their purchases,” said Steve Trumble, president and CEO of
American Consumer Credit Counseling. “If the parents’ money is involved,
or a parent cosigned 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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