Major Changes Ahead for Student Credit Cards

February 3, 2010, Written By Sarah Hefner

The Credit CARD Act will take effect in two weeks and one of the major
provisions is the restriction on marketing credit cards to young adults
under 21.

Currently it is easier for a college student to get a credit card than to
get up for class. College students use credit cards to pay for everything,
just like their parents. Once this new law takes effect, many college
students will have difficulty getting a credit card.

Beginning February 22, issuers are not able to offer free merchandise
to lure students to sign up for a credit card on college campuses, at
college sponsored events (like sporting events) or within 1,000 feet
of the campus. In addition, the CARD Act bans credit cards to people
under 21 unless there is an adult co-signer or the young adult can show
proof they have the income to pay the debt.

The regulations leave ‘sufficient income’ open to interpretation.
Some issuers will just want to know that your monthly income is more
than your minimum payment due. However, students need to assess
their own situation. If you are struggling to pay for your own food,
housing, transportation and education bills, you can’t afford to
carry a balance on a credit card.

Credit lines will also start out low. If there is no co-signer, credit
lines will be $500 or 20 percent of the student’s annual income. If
the student has more than one card, the credit line from all credit
cards will be up to 30 percent of the annual income.

College is a good time for students to learn how to correctly use
credit cards and build up their credit score. However, many students
are unprepared for the responsibility.

A 2009 Sallie Mae study showed that college students used credit
cards more than ever before. 84% of college students have at least
one credit card, 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 student
has 4.6 credit cards.

Only 17% of college students pay off their entire balance each month
and 1% had parents or other family members paying the whole balance.
The remaining 82% carried balances and paid finance charges each month.

Parents must educate their students about using a credit card. One-third
of students rarely or never discussed credit card use with parents, and
nearly all undergraduates would like more information on financial
management topics.

Parents can make the co-signing for a credit card a very teachable
moment. Tell your student how to deal with credit cards and the pitfalls
that exist. Explain how to read the monthly bill and how important it is
to pay the balance in full at the end of each month. Give them real-life
examples of the credit card mistakes you have made so they can avoid
making the same mistakes.

Options for Credit for College Students

1. Co-sign.
The student can apply for a card with an adult co-signer. If the
student is unable to pay off the account, the credit card issuer will
demand that you pay off that debt in full.

The loan will be reported on the student’s credit report. If it is paid
on time and more than the minimum, it will help increase credit scores.
However, adding your name to someone else’s debt is a very serious
financial step because this mixes your credit record to your child’s.
If either the student or parent defaults, mistakes become community
property and everyone suffers because the co-signer has committed to
make good on this account. Delinquencies will show up on both credit
reports.  The only way to get your name off of the loan is to pay off
the loan.

As a cosigner, your liability for the loan may keep you from getting
other credit because creditors will consider the cosigned loan as one
of your obligations.

2. Authorized user.
This is almost like an apprenticeship to teach your student how to
use a credit card. You give your student authorized permission to
use your credit card by adding him/her to the account. The student
can receive and use a card with his/her name on it without being
legally responsible for repaying the credit card balance.

The account is considered the same for credit scoring as if it were
owned by the authorized user. If you have a good credit score, your
student will benefit from that. However, if you have a couple of late
payments or get into trouble, this will also affect the authorized
user. Authorized users can be removed with a letter or phone call
to your issuer.

3. Open a Checking Account with a Debit Card.
A checking account with a debit card is a good first step toward
learning how to manage credit. While debit cards have their own fees
and downfalls, college students can get into far less trouble paying a
$30 overdraft fee than running up a significant credit card balance
and it does not pull down your credit score.

4. Prepaid cards
Opening a prepaid card may be the easiest option for students, but
their fees are higher. Make sure the card reports payment activity
to credit bureaus (many secured and prepaid cards do not).
AccountNow prepaid Visa reports to all three agencies. The
processing fee is $19.95, the monthly fee is $4.95 and there is
a $0.50 transaction fee per transaction.

Prohibiting promotional offers and marketing on campus will help
reduce impulse applications. If your student is qualified to apply for
a credit card, help them research credit card offers to find the
best card with the lowest rate. Use the Terms and Conditions to
compare cards and to explain the fine print.


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The information contained within this article was accurate as of February 3, 2010. For up-to-date
information on any of the terms, cards or offers mentioned above, visit the issuer's website.