Weigh the Risks and Benefits if You Want to Help Your College-Bound Child Get a Credit Card
Teaching your children about financial literacy can give them a solid foundation for financial success early in their independent lives
It used to be so easy for college students to get credit cards that they were inundated with credit card offers. The result was a student with too many credit cards and a corresponding high amount of debt. But once the Card Act was passed, it became much more difficult for those under 21 to get a credit card. They can still get credit cards, but they need their parents to help. But should you help?
Although wary parents may question the wisdom of helping their college-bound children get credit cards, helping to get a credit card could have benefits. With your direct involvement, getting a credit card can help students to learn how to manage credit responsibly. It can also provide funds anytime of day or night in case of emergency and to allow them to start building a credit history before they graduate. When they graduate college, they could be in a better position to get a loan for a car or a first home.
Financial Literacy Topics
Teach the student about financial literacy topics, such as credit and credit scores. This is a topic most high schools do not cover, so parents should cover it before the child leaves home regardless of whether or not he or she will be getting a credit card. Ensure that he or she understands that responsible use means never charging more to the card than can be paid off in one month; explain how to determine the amount owed on the card and how interest is calculated; and highlight the "minimum payment warning" to show the student the monetary amount and length of time necessary to pay off the card if he or she makes only the minimum payment every month.
If you can find a student card that gives the added bonus of rewards, that's great. But most credit cards specifically marketed for students or as student cards won't offer the same types of perks and rewards as the credit cards we have in our wallets. But that's not a problem. The main purpose of having a student card is to build a good credit history so that the student can qualify for better cards and loans in the future. Instead of a rewards card, aim for a good card that will keep interest payments low and will report a credit history to all major credit bureaus.
Understand Options for Parents
One option is to add the child as an authorized user to a card the parent already uses. With this option, bills will still go to the parents and the child can be removed from authorized use of the card anytime. But he or she will still be building a credit history.
Another option is for the parent to co-sign on a student card, which is similar to co-signing for a car or other type of loan. So that means the parent will be equally responsible for the debt. And if the child runs up a balance or misses a payment, the credit scores of everyone tied to the card will be affected.
A third option is to co-sign for a secured card. These cards require a bank account to be set up with a cash deposit to become the card's collateral, and they have a limit at or near the amount of money actually in the bank. Parents should try to find a card that will report payments to the credit bureaus so that the student benefits from the credit history.
Keep an eye on things
It's necessary for parents to keep watch on the child's payments since the parent may be financially responsible for the debt. It's also a good idea for the parent to sign up for text alerts for unpaid bills or if spending runs higher than a certain limit.
We all know what it's like to be young and experience the freedom of having credit for the first time. With that in mind, you know how easy it it could be for your student to get carried away with swiping a card. You run the risk that the student might rack up too much debt too quickly, which could also sink you if you're tied to the card. Other pitfalls include unexpected annual fees, which could end up being too high to justify the card, or introductory interest rates that can skyrocket after a few months and lead the balance to grow with it.
We've often been told to cancel credit cards we aren't using, but that's a mistake. Part of your credit history is the length of time you have your credit accounts. If you cancel a student card after using it for four years, your oldest account on your credit history will only be four years until your next account becomes older. Instead, keep using it if the rates are good, ask the card issuer to upgrade it, or keep it but don't use it.