Sending a child off to college is associated with a host of parental worries. Thanks to a law which took effect a few years ago, known as the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2010, credit misuse is less of an issue than it once was. The CARD Act was designed to protect college students from some of the predatory lending practices which had become common on campuses.
This is good news for parents of young adults, who have often found themselves in the difficult position of bailing their children out after charging thousands of dollars — or watching them struggle with overwhelming balances.
Why do credit card companies look at college students as a good risk? Many creditors look at money from Mom and Dad as “income.” And in a few years, the educated kids will earn good salaries and maintain life-long loyalty to the cards.
Money Management Education Works
According to the latest Sallie Mae study, college student ownership of credit cards has declined from 42 percent in 2010 to 35 percent in 2012. Among freshmen, only 21 percent have credit cards in their own name, though for seniors, the figure rises to 60 percent.
Much effort has been put into educating the public in general when it comes to the trap credit can create if it is not used wisely. Statistics from Sallie Mae suggest this effort has paid off handsomely as students show greater fiscal responsibility.
Just a few years ago graduating seniors reported having average debt load of $4,100. When questioned about their debts the majority at that time said they were unaware of how much they owed and were surprised at their balances. Contrast this with more recent study results:
- Most college students say they exercise caution using credit cards. Roughly 60 percent say they are good or excellent at money management, and evidence backs up the notion that there has been significant improvement.
- 33 percent of student credit card holders report maintaining a zero balance and 42 percent say they keep the balance at $500 or below.
Still, 23 percent do say their parents help pay their credit card bills, at least in part.
The CARD Act, combined with intense consumer education and diligent parental guidance, has improved the credit outlook. Still, the stakes are high so it’s important to continue talking to students about the need to keep a handle on debt.
When it comes to taking on debt based on an expected future salary, optimism can create a vicious circle. A student who anticipates a healthy starting salary may — on that basis –take on student loans which are not essential. Once the student graduates or is about to graduate he or she interviews for appropriate jobs. But the potential employer takes a look at the applicant’s debt load and decides instead to hire someone who at least appears to be more fiscally responsible, based on a credit report.
CARD Act
The CARD Act changed the rules so that young adults with no income (other than money from their parents) could no longer independently apply for credit cards. Without a co-signer (such as a parent or guardian older than 21), credit card companies have to restrict the credit issued to 20 percent of his or her income.
Once a co-signer agrees to become jointly liable, the income restriction is removed. Although the co-signer must approve any rate hikes, parents who consider becoming co-signers should be aware they are liable for the debt in full, rather than half of the balance.
The CARD law also stopped companies which did a major push on campuses, trying to entice students to apply for credit with promises of free gifts, such as T-shirts or posters.
“Affinity cards” are still widely used on campuses, and schools can cut deals with the issuers to provide them with personal information about students. Affinity cards are branded with the logo of the school and promoted based on the information the school provides. Universities in exchange, get a percentage of purchases made with the cards, and that of course, is an incentive to universities to promote the use of the cards.
In spite of the weak stance on affinity cards, the CARD law has been part of an improvement in the student credit picture. Overall, young adults with little independent financial experience with responsible credit use are less likely to be bombarded beyond their level of fiscal sophistication.
Parents Still Need to be Proactive
Having a credit card can be a good safety net for a college-age student to fall back on in an emergency. Consider co-signing on an account with a low credit limit, say $500. Or set up a “secured” line of credit before your child leaves for school. You deposit money into an account — and the amount you pay is the card’s limit. Let the student manage the account. (Check out other recommendations for responsible credit use in the right-hand box.)
Debt problems can destroy young lives. Watch for signs of depression and financial trouble. If your child is already in debt and unable to handle it, help negotiate lower payments or contact a non-profit credit counseling service for assistance.
Tips to Help College Students Manage Credit Responsibly
Talk with your children about credit. Even though studies show much improvement overall, there are still many students who say they never or rarely discuss finances with their parents.The majority of students surveyed indicated they want more training in money management.
Help your child select an appropriate credit card. Try to convince your child to get a debit card instead of a credit card, so he or she can’t get into too much debt. If your child obtains a credit card, you should help select it.Go through several credit card offers together, comparing interest rates, annual fees, grace periods and penalties.
Explain the basics. Make sure your child understands if the balance isn’t paid in full each month, a significant amount of interest will be paid on the outstanding balance. If you teach your child nothing else, instill the concept of paying credit card balances off in full every month if possible.
Educate your child about late fees, “teaser” interest rates, annual fees and credit ratings.
Counsel your student to use credit only for major purchases, not to fund luxuries. Credit cards can be used for things like books or car repairs, but should be avoided for dining out, entertainment, electronics and expensive clothes. The best policy is to charge only what you can pay in full each month. Otherwise, you end up paying interest on a pizza you probably don’t even remember.
Review your child’s credit card statement on a regular basis. Show your child how to compare receipts to credit card statements. Explain how credit cards can increase impulse purchases.
Warn your child to keep the card in a safe place to avoid unauthorized use and identity theft. This is even more important for debit cards which have less protection.
Be conscious of the money messages you send. How you treat money can have a significant influence on your child’s views. If you use credit cautiously, your children are more likely to learn not to abuse it.
Other Tips from Sallie Mae for students:
- Pay your bill before it is due. Waiting till the last minute can cause accidental late fees.
- Think of credit as a convenience, not an additional source of money. Ask yourself “Do I need this or do I want it?” If the answer is “want,” don’t charge it.
- Retain sales slips and compare them to your bill. If there are errors or you suspect identity theft, contact the card issuer immediately.
- Don’t accept increases in your card limit. Keep it modest.
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Brought to you by: Peterson Whitaker & Bjork, LLC
