Do you have children in college? Have you talked with them about how to handle credit?
When I wrote about this topic in 2008, students were inundated with credit card offers. According to Benjamin Lawsky, who, as a special assistant to the New York state attorney general, testified before the U.S. House of Representatives’ Subcommittee of Financial Institutions and Consumer Credit, “marketers set up tables in high-traffic spots on campus, such as cafeterias, student unions, bookstores, and other campus buildings … (and at) campus events including freshman orientation, activity fairs, athletic events and graduation fairs.”
Then came the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act).
Now, companies cannot sign up individuals under the age of 21 without a co-signer or proof of personal financial resources. Marketers offering incentives like pizza can no longer do so while at “an institution of higher education” or even within 1,000 feet of the school. They may not make such offers “at an event sponsored by or related to” the school. Preapproved offers of credit to individuals under the age of 21 also are prohibited.
Still, card offers are being made, and students need to know whether to act on them. You can expect that student credit cards will have less favorable terms than those offered to people who have a credit history; students are higher-risk borrowers.
Further, students, even those over age 21, may not understand that missing a payment or making a late payment not only increases the cost of credit, but also creates a negative credit history, something everyone should work to avoid.
“A bad credit history can make it harder for you to get mortgages, car loans and credit cards in the future,” explained Matt Schulz, a senior industry analyst at CreditCards.com, a credit card comparison website.
“If you do get them, crummy credit can also cost you a fortune over the years in the form of higher interest rates and fees. It can also stand in the way of getting a job,” explained Schulz.
What can a parent do?
Since going away to college is the first step toward independence, you want to be sure that you respect your child’s need for self-sufficiency. But that doesn’t mean he or she has to go it alone. There are simply too many serious, long-lasting repercussions.
Communication and planning are key.
First, before your child leaves for school, talk to him or her about the benefits and the detriments of getting a student card. Establishing a credit history is a benefit. So is learning the discipline of paying bills on time to avoid a negative history.
Second, research options together with your child. Look online at CreditCards.com (search for “student cards”), WalletHub.com (click on “Credit Cards,” then “College Student”) or creditkarma.com (go to “Credit Cards,” then “Student”). Consider the fees, rates and penalties of different cards, and make a joint decision on the type of card that might make sense.
For example, you might consider prepaid cards or secured cards. Prepaid cards work like debit cards. No credit is extended. You prepay the card, and when the balance is low, you fund it. Secured cards require a cash deposit that acts as the credit line for the account. This allows a credit limit to be established, without risk to the bank.
Third, decide on an acceptable monthly budget and what to do if it isn’t followed. Talk about how you would like your child to communicate with you if that happens.
Fourth, determine whether you and your child agree that he or she should not accept credit card offers before reviewing them with you.
Fifth, agree on how the two of you should check in with each other. Will you talk each month about finances, perhaps setting a date in advance? Will you encourage your child to let you know about challenges before they become problems?
In the beginning, your child will benefit from some gentle guidance. You don’t want him or her to be adrift in a financial morass that could have been avoided with a little planning and care. Financial literacy calls for learning a new skill, and it is not reasonable to expect a child to go on this financial journey alone.
For information on the impact of the CARD Act, read the Consumer Financial Protection Bureau’s report (the Card Act Report), which you can find at consumerfinance.gov.
Julie Jason is a personal money manager at Jackson, Grant of Stamford, Conn., and an awardwinning author. Contact her at firstname.lastname@example.org.