The Changing World of Student Credit Cards
Millions of students will go to college in the next few weeks, making this the perfect time for parents to talk to their son or daughter about the correct usage of credit cards and the dangers of debt.
This is also the last full semester before the Credit CARD Act goes into effect in February of 2010. At that time, the marketing of credit cards to students will have a number of new restrictions.
The Credit CARD Act will prohibit issuers from lending to anyone under the age of 21 unless he or she has a co-signer or has proof of the ability to make payments. Unsolicited card offers will be prohibited to everyone under 21. Credit card companies cannot try to lure students into signing up for a credit card with any tangible item anywhere on or near a college campus or a college-sponsored event.
These regulations will make it much harder for responsible college students to get a credit card and begin building their credit score. In general, credit scores are growing in importance for young adults. Lenders and apartment managers are using credit scores to help make judgments about the applicant and reduce their own risk. A low or non-existent credit score could mean higher rates for loans at a time in life when a young adult needs a break.
So the law places an unintended penalty on those financially responsible students. But in looking at a recent Sallie Mae study, it is easy to see why lawmakers put these restrictions in place.
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 number of cards per student is 4.6. Only 17% pay off their entire balance each month and 22% make just the minimum payment.
Issuers have aggressively marketed cards to college students because they know that many parents will pay off the bill if the student runs up debt. In addition, brand loyalty is determined early in life, so many young cardholders keep their first card for many years.
These Sallie Mae statistics show the importance of teaching college students how to correctly use a credit card. If parents don’t teach them, young adults will be forced to learn from their own mistakes.
Parents should teach their student how to budget, spend wisely, and use credit. Start with your 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 when is a good time to use a credit card for payment (textbooks, emergencies) and what isn’t (clothing, food, entertainment). Advise how to avoid credit card theft: keep the card with you and don’t let someone else use your card. Explain the fees and penalties. Use online payment with reminders to help avoid late payment. Know your 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. Credit cards aren’t to be used to purchase something you can’t afford. 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.
The CARD Act will force parents to take more responsibility for credit cards for their college students. Co-signing is one of the options to help your student get a card. The card is in his/her name and they pay the bills, but your name is also on the card. If your co-signer makes a late payment or runs up a balance, this impacts your credit score. If they can’t pay the loan, you are held responsible.
You can also make your student an authorized user on your account. As an authorized user, they can make charges to your account. If you have good credit and they use the card responsibly, this will help build their credit score. However, if the parent or student has late payments or a high balance, it will pull down all credit scores. Authorized and co-signed accounts give parents a chance to monitor the student’s spending.
Another option is a secured card. These 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 they are secured by prepaid deposits. Make sure that the card reports to a credit agency. Secured cards from Orchard Bank and First Option Visa both report to credit agencies.