With the introduction of a new consumer protection law, credit card companies are no longer able to open accounts for adults younger than 21 unless the applicants have sufficient income to pay the bill. While the demise of too-easy credit on campus may be a good thing for students, it leaves many of them with only one avenue for getting plastic: their parents.
The change came about due to the Credit CARD Act of 2009, which gives young adults 18 to 20 years old just two choices if they want credit in their own names:
Demonstrate the ability to repay by having an independent income source -- a difficult feat for serious students.Get a co-signer -- with all the negatives that go with co-signing.
But if parents get involved, more choices open up for their 18-, 19- and 20-year-olds.
Parents have five other payment options. Depending on your situation, some will suit better than others, or you can mix and match. Here are the five choices, along with advantages and disadvantages for each:
1. Authorized user credit cards with credit limits
Almost every card will let you add an authorized user. Little-known fact: Some cards will also allow you to set a lower balance limit for that user. And that can be one option for college parents.
But you may have to shop around to find a card that will do it. "It's a niche market," says Nessa Feddis, a vice president with the national trade group American Bankers Association.
It also pays to ask a lot of questions. "There are different ways you can have an authorized user, and you want to be careful with these," she says.
Find out what happens if the kid exceeds the balance you set. "That's important," says Gail Hillebrand, senior attorney for Consumers Union. Is there an over-limit or other fee or will the card just stop working? Is there a fee for adding a user or getting an extra card? Can you raise or lower the spending limit to cover cyclical expenses, like books? And what happens if the child pops the card into an ATM?
With a responsible kid and the right card, it can be a safe, effective way for parents to give kids access to plastic for emergencies, says Scott Bilker, CEO and founder of DebtSmart.com. "I think it's probably the best option," he says. The parents are able to oversee the credit card usage."
"And you can review the bill with the child or have them write you a check," he says.
The upside: It's your account, so you know if the bills are paid. You can also see all the charges. Federal law limits your liability to $50 if the card is lost or stolen (and most card companies lower that liability to $0). Plus, if you have a good credit rating, it will help your student build a good credit history.
The downside: You're legally responsible for the charges, no matter who makes them. If you student runs up a bill, and doesn't pay it off, it could hurt your credit score and his. And even if the bill is paid in full every month, adding to the working balance can, in some cases, lower your credit score.
2. Debit cards
These days, the debit card is a check book in plastic form. For college students, swiping debit cards feels more familiar than writing checks. And many older generations remember the days when a debit or even a simple ATM card was their only form of plastic on campus.
"This is what a lot of us started with," says Feddis.
Like any other payment method, the devil's in the details. If your kid can't balance a check book, the debit card can be inconvenient and even downright expensive. Overdraft fees are typically running $35 to $40. One solution: don't opt in to "overdraft protection." The rules are changing to require banks to give you the choice of whether to take their overdraft protection -- and the hefty fees that go with it.
Don't sign up, and that way, the card stops working at $0 and charging that $3 cup of coffee won't cost your kid the equivalent of eight fast-food meals.
The upside: Debit cards are easy to get and they're widely accepted. If you open a joint checking account you can monitor your child's spending and deposit extra money when he needs it.
The downside: Your kid is limited to spending the amount that's actually in the account. So if your student has an emergency, like an ER visit or a car repair, someone might have to make a quick deposit. The cards don't help your student build a credit rating. They also don't offer all the buyer charge-back protections of credit. In case of returns, it often takes a while for the money to be re-credited to the card. If your student uses it at a merchant who authorizes more than the purchase amount (some gas stations, restaurants or hotels), additional funds could be frozen for a period of time. And in cases of theft or fraud, you're working to get missing cash returned rather than getting a credit to the account.
3. Secured cards
How it works: You give the card company a deposit, usually equal to the amount of the credit limit, which it holds as security for the life of the card. Other than that, a secured card works like a regular credit card.
"It's a good option if you want credit in their name," says Bilker.
But secured cards "tend to be a little more expensive and tend to be for a lower [balance] amount," says Feddis.
And watch the interest rates, too. "APRs are going to be high," says Hillebrand.
So if this option appeals, shop around for the best deal. And look for a card that will convert to a regular, non-secured credit card after a period of a year or two of good behavior.
Students will still have to show that they have sufficient income or assets to pay the monthly charges, even with a deposit, says Lynne Strang, vice president of communication for the American Financial Services Association, a trade group for the consumer credit industry. But in many cases it should prove easier for students under 21 to get secured cards than unsecured cards, she says.
The upside: Your student will have all the buyer protections and security of a credit card. It's usually easier to get than an unsecured card. And it will help your student build credit.
The downside: Students still have to meet some income or asset requirements. You or the student will be tying up cash to fund the deposit. Balance limits tend to be low, so if the card is for emergencies, it may not be enough to cover what your student needs. And if your child does't pay the bills on time, he or she will be building a poor credit history, which is worse than no history at all.
4. Reloadable pre-paid cards
Reloadable pre-paid cards work almost like a hybrid of a debit card and credit card. You or your student loads it with cash as often as you want, often through a credit card, debit card or bank account transfer. Carrying a credit card brand, the plastic spends like a credit or debit card and can be used wherever that card is accepted.
These cards are available from a wide variety of sources, everywhere from your local supermarket to well-known and little-known banks to major card companies. It pays to shop carefully. There is a wide array of reloadable pre-paid cards and they can differ widely in policies, prices, consumer protections, how you reload it, and even the personal information you have to supply.
It also pays to watch the bottom line, says Jeannine Moore, spokeswoman for the Consumer Credit Counseling Service of San Francisco. "They can be great," says Moore. "But there can be fees, which can be steep."
Cards often charge a fee each time you put money onto the card, and there may be fees for other actions (like going to an ATM), as well, so ask before you buy. There can also be limits (minimums and maximums) on how much money you can load onto to the card and how much cash your student can take from the ATM in a given period.
Typically, you can get them without a credit check, but you may be asked to share some personal financial information.
One big advantage: Since often these cards are designed for teens and college students, many have features that will let parents monitor spending. "Parents can set spending limits or block certain [spending] categories," Lisa Santana, senior manager at Discover, says of the company's reloadable Current card. "Parents can also sign up for email or text alerts, letting them know purchases have been made and where."
The upside: Often, cards don't require a credit check. They are widely accepted. In most cases, cards stop spending at $0. With some cards, you can monitor or limit your student's spending. Some cards offer $0 liability if the card is lost or stolen. And if the student mishandles the card, it won't affect anyone's credit score.
The downside: You need to ascertain what happens if the card or card number is lost or stolen. As with a debit card, your student is limited to the amount loaded onto the card, has to track spending and balances, and isn't building a credit history. There will be fees and you (and the student) need to understand the fee structure. You may be asked to share some personal financial information when applying. There may be requirements (minimums or maximums) for adding money or limits for taking cash from ATMs. Parents may need a credit card, debit card or checking account to open or fund the card and there may be a lag time between when money is transferred to the card and when it is available to spend. With returns, there could be a period of time before the money reappears on the card. And if your student uses the card at places that typically authorize more than the purchase amount (some gas stations, hotels or restaurants), the merchant could freeze more than the actual total, tying up those funds for a while.
5. Gift cards
You can buy credit card-branded, fixed-amount gift cards almost anywhere, for amounts that often range from $25 on up to several hundred dollars. They spend like a credit or debit card, and can often be used anywhere the regular credit card is accepted.
"Look at the fee structure and the expiration date," advises Feddis.
With most cards, you'll pay a fee plus the amount on the face of the card when you buy them. With the advent of the Credit CARD Act, inactivity fees are gone, but there could be other actions that trigger charges. And cards are good for five years, unless they state otherwise.
For big-ticket student emergencies, a gift card "would work, but you have to have enough money on that, which means you're loading it up with real cash," says Bilker.
The upside: Gift cards are convenient, prevalent and don't require a credit check or bank account. They stop spending at $0, which means your student is never spending cash he doesn't have. And since they hold a limited amount of money and aren't linked to a bank account, they can be a safer alternative for online purchases than a debit card, especially if your student is putting those card numbers into a communal computer.
The downside: There's a fee to buy "use anywhere" gift cards (sometimes called "open loop" gift cards). Your student will not have the same legal theft and fraud protections as with a credit card. (Some cards do protect against loss and theft, so check the policies before you buy.) Gift cards don't build a . While cards are supposed to be accepted at any location that takes that card brand, some merchants (online and off) will refuse gift cards. You can't use them at an ATM. If the merchant authorizes more than the purchase amount, it may temporarily reduce the balance by more that your student spent. Also, if your student has to cancel a transaction or return a purchase, there can be a lag time before the money is credited back to the card.
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