Should you help your student get a credit card?
This is a new question that parents can ask themselves beginning this year when they send their child off to campus. New rules that went into effect in 2010 make it tougher for students to get a credit card.
It used to be that credit cards were one of the (many) fears a parent had about sending their child to live on their own. It wasn’t without reason, a study released by Sallie Mae in 2009 showed that 84% of undergraduate college students had a credit card and half had 4 or more credit cards. The average debt on those cards was $3,173 and over 12% had a balance over $7,000. That’s a lot of debt to add to student loans and other obligations.
Beginning in 2010 it’s going to be harder for students to get a credit card. People under 21 now need to have a co-signer for a new card unless they can show that they have sufficient income to pay for the charges on the card. It’s harder to apply as well. Telephone applications are no longer allowed and the gifts some card companies used to pass out for credit card applications are no longer allowed.
So is it good to have a credit card? I have been talking to college students about personal finance issues for a long time. In all these years, I’ve not advised the students to avoid credit cards. I’ve instead tried to educate them about how to use credit cards responsibly. We’ve heard the horror stories about how credit cards get some in trouble. But, credit cards are an excellent way for a young person to build a good credit history. They have other advantages as well. They are safer than carrying cash and have other advantages as well. Credit cards can be a great way for a student to pay for books and other necessities. It’s also a good emergency loan should the student need cash for an unforeseen car repair or similar situation.
The key is to use them responsibly. I always advised the students to treat the card as if it were cash. That means that if they knew they didn’t have the money in their bank account to pay for the purchase, then they shouldn’t buy it with a credit card either. The key is to make sure that a new credit card user knows how the cards work and that the credit card has a reasonable limit to prevent spending into a deep hole. There was a public service campaign a few years back that maybe had the best advice – just “keep it in your pants”.
Some useful links:
Sallie Mae report on credit card use
Financial Fitness Ohio
New credit card act brings changes for students
Philip Laube is a CPA in Ohio and the Assistant Vice President for Business & Finance at Muskingum University. He presents and writes about personal finance issues for college students. He can be followed at twitter and on his web site