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
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.”
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.
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.
“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.”
“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
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.”
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
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.
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.”