By Diana Palmieri
Congratulations! Your child has just graduated from high school, and now with summer here and quick to pass, before you know it, your child will be making his or her college debut in the fall. As a parent, you have many worries and concerns understandably on the horizon. Will they drink too much? Will they go to class? Will they eat? Another terrible thought you may not have the energy for: Will they leave college with too much debt as they enter the workforce?
A recent Consumer Reports survey states that the 2011 graduating class of college seniors had the highest average date to debt. Student loan debt recently surpassed total credit card debit in the United States. This is scary, and with rising tuition costs, it will most likely get worse.
The Credit Card Accountability Responsibility and Disclosure Act (CARD Act) was signed by President Obama in 2009. It was designed to help keep younger people from being taken advantage of by credit card companies. Anyone under the age of 21 cannot apply for credit cards unless they have a source of income or a co-signer on the account. This can be good and this can be bad, just like any other act signed into law. Of course, you would want your children to start establishing good credit at an early age, but you don’t want them to overdo it and get themselves into trouble.
What kind of card is suitable?
You probably see signs all the time for “great student rates” on credit cards. Much like shopping for rates for yourself, you obviously want to shop for great-rate/low-fee cards for your kid. Sticking with a bank that you may have an established relationship with is a good place to start. Some banks will offer a 0% rate for a limited period of time; both of you need to discuss and be aware of the potentially higher rate that will come after the 0% period ends. Keep in mind student credit card rates tend to be higher because there is no credit established yet. Combine that with a late payment, and your kid could really end up in a bind (if you co-sign, you are in that bind as well). Usually a late pay on a 0% APR will mean you will lose that 0% rate and also get hit with a late pay fee, so paying the bill on time should be a top priority. The bottom line is to read the fine print and try to impress that paying the bill in full every month is always the best way to go.
Then there are secured credit cards. A secured credit card requires a cash collateral deposit that becomes the credit line for that account. For example, if you put $500 in the account, you can charge up to $500. You may be able to add to the deposit to add more credit, or sometimes a bank will reward you for good payment and add to your credit line without requesting additional deposits. I think this a terrific way to get your child to understand budgeting and credit. Once again, read the fine print and ask questions if you don’t understand something. There are usually application and other fees involved. Shop around.
If you feel your child is not a good credit card candidate, there are debit cards that work like credit cards. This will give them money to use should they need it in case of emergencies and can be used as a credit or debit card. Much like with a secured credit card, they learn the basics of sticking to a budget because of a set dollar amount. The only drawback with this is they do not establish credit, and there is the potential of overdrawing on the account where the funds come from (meaning if you are funding it for them from your checking account, the overdraw feature will take the difference from your savings for a fee–my bank does that).
Background and credit checks are becoming common for potential employers; this is why it is so important now to have your new college student become familiar with the workings of credit cards and debt. Building a solid credit history is going to make the difference in securing decent rates on future car loans, mortgages, or even approval for an apartment lease. Comparing good credit to a college GPA, if your child screws up freshman year and ends up with a low GPA, think of the uphill battle to repair and raise it by senior year. Negative credit information has the potential to stay on a credit report for seven years. Think about it, and please use those cards wisely!
Diana Palmieri is dually registered with Vanderbilt Securities LLC and H Beck Inc., which are unaffiliated. Securities offered through Vanderbilt Securities LLC, member SIPC/FINRA/MSRB.