A new class of freshmen is settling into college life, and a new financial independence that often includes, for the first time, credit cards. A recent survey in the International Journal of Business and Social Science found that half of college students own four or more credit cards.
But should students’ new lifestyle include credit cards?
Once upon a time university quads were lined with folding tables piled with “free” Frisbees, T-shirts, and water bottles given out in exchange for a credit card application — just sign at the X.
“Typical college students make very attractive customers for credit card companies,” said Leah Hampton, a CPA from Lexington, Kentucky. “Most college students think about the here and now, and are not focused on their financial futures.”
Today, thanks to 2009’s CARD Act, students must now demonstrate financial capability or have a creditworthy co-signer in order to get a credit card, but the requirements are still lax.
“I've heard stories about students listing their student loan availability in the income section and getting approved, " said Mitchell D. Weiss, who teaches a financial literacy course at the University of Hartford in Connecticut. "I've heard about students asking friends and relatives to cosign."
Your college kid, in other words, can probably get a credit card if he or she wants one. And it may not be a terrible idea. Credit cards provide a backup plan for emergencies, and allow students to build a credit history.
The question is, What can a parent do to mitigate the dangers — the debt and bad credit scores — that can haunt the student, and parents, for years after graduation?
One strategy is to arrange for a secured credit card, which is like a prepaid card, but which allows the students to establish “credit-creds.” (Make sure the bank that issues the card reports to a credit agency, so a credit history is created.)
Parents can also give the student an authorized card on the parent's existing account, with certain safety measures in place. The student's card number should be different (in case it's compromised) and a maximum charge should be established.
For students over age 21, Weiss recommends two credit cards: one for routine charges that are within a student's monthly budget and can be settled without carrying a balance, and a second card for emergency expenditures that may have to be carried. “That way, routine charges won't incur interest costs and the emergency expenditures can be settled over a reasonable period of time,” said Weiss.
Be aware of other cards your child may have, like debit cards that go with his or her new checking account. Make sure they set up overdraft protection as a safety net for those adjusting to the concept of balancing a budget.
Students also need to learn to protect their valuable new information. Marian Merritt, a
Norton Internet safety advocate, points to unfamiliar Wi-Fi hotspots and unsecured dorm rooms as places where login credentials and banking transactions can be intercepted by hackers.
Your child's financial education, experts say, is like other steps to adulthood parents need to attend to. According to a recent survey of more than 1,000 college students by CreditDonkey.com, only 63 percent said their parents helped them learn about managing their money, whereas 82 percent taught them how to drive.
“Until more parents teach their kids about money, I recommend a graduated path from cash, prepaid, ATM, authorize, cosign, secured, to unsecured credit cards,” saidCharles Tran, founder of CreditDonkey.
Until the student "graduates" to an independent card, watch them carefully. Giving a student a credit card “doesn’t mean they have unilateral control over their purchases,” said Steve Trumble, president and CEO of American Consumer Credit Counseling. “If the parents’ money is involved, or a parent cosigned for the card, then the parent has every right to set limits. It’s important for parents to monitor their kids’ spending to make sure they’re using the credit card responsibly, especially when they first go away to college.”
“Also, students should keep up with their finances as carefully as they would their schoolwork," says Creditcard.com.
That presumes, maybe optimistically, that college students are paying sufficient attention to their studies. "If all else fails," Creditcard.com says, "they should use cash.”