Give Them Some Credit

There I was, excitedly slicing open the firm envelope and pulling out a shiny, new credit card. It was my first one, and everything about it was groundbreaking.

I was one of the first groups to giddily take part in a special student promotion at my university. The plan was clever: Kids, have you completed one year of college? Then, here—take this credit card. Get to spending!

You can probably guess where things went from there.

“By far, the biggest mistake parents make with their kids and credit cards is co-signing.”
– John Ulzheimer, president of Consumer Education at SmartCredit.com

Heavy Debt

College students and credit cards: Seems like a match made in debt collectors’ heaven, no? Parents—currently being hounded by their college-bound kids to get their very own card—are right to be hesitant about letting them sign on that dotted line. “Credit card debt will likely be the most expensive debt you'll ever carry,” says John Ulzheimer, the president of Consumer Education at SmartCredit.com. “The average interest rate on credit cards is 13 to 15 percent. And for retail cards, like Macy’s or The Gap, you’re looking at average interest rates in 20s.”

New Laws

For young people, getting a credit card isn't like it used to be. No more slick promotions. A new federal law, the CARD Act of 2009, actually prevents anyone under the age of 21 from opening a credit card without a co-signer or proven income from a job. “The good thing here is our kids aren’t leaving college saddled with enormous credit card debt,” says Jean Chatzky, author of Money Rules and finance editor for NBC's Today show.

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Starting Early

Although high interest rates and onerous debt are sobering realities, there’s actually a benefit to young adults getting their own credit cards, says Kimberly Foss, a financial planner and the founder of Empyrion Wealth Management in Roseville, Calif. “When used responsibly, credit cards help establish a credit history,” she says. And starting early means a young adult’s account has time to age. This becomes very helpful when, after graduating, your child tries to rent an apartment or buy or lease a car. His credit score will likely be higher because of this track record.

Choosing a Card

The “save more when you open a card today” offers at retail stores may sound tempting, but don’t fall for it, Ulzheimer says. “Stick with a general-use credit card: Visa, MasterCard, Discover or American Express. Interest rates are lower and credit limits are higher on these.” Also, consider a charge card—such as AmEx—where the balance needs to be paid in full every month. “Your kids will have to pay a membership fee,” he says, “but with charge cards they can avoid carrying debt and paying high interest fees.”

The Big “Don’t”

“By far, the biggest mistake parents make with their kids and credit cards is co-signing,” Ulzheimer says. “It’s an absolutely horrible idea.” Here’s why: Co-signing is essentially taking out another credit card for yourself. You are on the hook for payment if your kid defaults. Your credit score takes a hit, too. “Parents need to know that they are taking on the liability for this debt,” he explains. “If parents don't fully understand all of the obligations of co-signing, they should not do it.”

Alternatives to Co-Signing

Chatzky, a mother of two, is currently making this decision about her college-bound son getting his own credit card. Her advice: Add your kid as an authorized user to one of your cards. “Make sure the credit card company reports data of the authorized user to the credit bureau (paid on time, how much they spend, etc.),” she notes. “This helps creates a credit history for your child without having to sign up for a card of their own.”

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Get It Secured

Another way to help your kid build credit without falling into the co-signing trap is by opening a secured credit card. “It looks and operates like a regular credit card,” Chatzky explains, “but in order to get it, you have to deposit a certain amount of cash with the bank that issued the card. That amount becomes your spending limit.” The good news is, after consistently paying the secured credit card bill (for 12 to 18 months, in most cases), “it converts and becomes a regular card,” Chatzky says.

Credit Card With Training Wheels

Both Chatzky and Ulzheimer recommend that parents explore all of the benefits of going the “authorized user” route. “Some cards, like American Express, allow you—the main cardholder—to set independent spending limits for the authorized users,” Chatzky says. “You can call up and ask that a spending limit be placed on your child’s card.” And if your child abuses the privilege of being on your account, you can easily remove them. You are always in control. “It’s like giving them a credit card with training wheels,” Ulzheimer says.

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Have a Sit-down

Before even looking into the different credit card options, parents should talk with their kids about what it means to have good credit and why it’s so important to maintain, Chatzky says. “This talk needs to happen before freshman orientation, then again on summer break, and again before graduation! It’s a crucial conversation.”

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