Want to Help Your College-Bound Child Obtain a Credit Card? Weigh the Risks and Benefits
Teaching your child financial literacy can give them a solid foundation early in their independent life
Before 2009, it was so easy to sign up for a credit card that college students were often left with unmanageable numbers of cards—and unmanageable amounts of debt—particularly once the recession hit. Then the Card Act was passed, and it became much more difficult to get a card under the age of 21.
It is still possible for unemployed young adults to obtain a card, but they will need the help of their parents to do it. Although wary parents may question the wisdom of such an act, helping their child to get a card may have several benefits. For example, it may help students to learn how to manage credit responsibly, provides funds at any time of day or night in case of emergency, and enables students to begin building a good credit history before they even graduate.
"That puts them in a better position when they graduate and they're looking to get loans for their first car or their first home," explained Bruce McClary, a spokesman for the National Foundation for Credit Counseling.
There are three steps that parents can take if they want to help their child obtain a credit card.
First, 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.
Second, understand all the options available for parents. One option is to add the child as an authorized user to a card the parent already has. Under this option, bills will still go to the parents; the child can be removed from authorized use of the card at any time; and he or she will still be building a credit history. Another option is for the parent to co-sign on a student card.
There are many issuers that offer cards that have low fees, (relatively) low limits, and rewards targeted at students, who will receive the bill. However, as the co-signer, the parent will be equally responsible for the debt, and if the child misses a payment or runs up a balance, the parent's credit score may be hurt and the parent may find it difficult to be removed from the card at a later time. Finally, 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.
Finally, it is necessary for parents to keep watch on the child's payments since the parent may be financially responsible for the debt. It is a good idea for the parent to sign up for text alerts that will notify him or her if a bill is not paid or if spending runs higher than a certain limit.