College, Kids and Credit Cards
Just before kids head off to college, it’s a good idea for parents and students to have a “money talk” so parents can set the guidelines for monthly campus (and off-campus) spending, and their kids can begin to learn some basic money management skills.
Parents are often faced with the dilemma of whether to encourage their students to get a credit card, or have them use a debit card with a set amount of money transferred monthly into a checking account.
A new wrinkle in this consideration has appeared courtesy of the Credit Card Accountability, Responsibility and Disclosure Act, aka the CARD Act, which went into full effect as of August 22nd. One of the provisions states that a person must be 21-years old to open a credit card account unless he/she can prove enough income to support the credit card payments or someone over 21 co-signs for the account. If the student doesn’t have sufficient income to qualify should the parents get their student a card and act a co-signers?
A benefit to a student having a credit card, provided it’s used responsibly, is establishing a good credit history which will result in a good credit score. The two biggest components of the FICO credit scoring model are monthly payment history and credit availability. The student must stay within his or her credit limit, make timely monthly payments, and hopefully pay all or most of the balance in full every month to get a high credit score.
But, when a parent (or anyone else 21 or older) co-signs for the credit card account, that means the co-signer is totally responsible for any and all amounts owed on the card if the other account owner doesn‘t pay. One CARD Act rule does mandate that if a cardholder has a co-signer and wants to get a higher credit limit the co-signer must agree in writing to the increase, so parents can have some control over spending limits. However, when a student has parents on the hook if something goes wrong or spending gets out of hand - due to an emergency, of course - there isn’t a real feeling of financial independence or accountability.Continued on the next page