"Those were the days when credit card companies could take extraordinary steps to attract college customers," says Paul Golden of the National Endowment for Financial Education® (NEFE®). "They'd mail preapproved card offers with high credit limits to students who had little or no income. And they'd storm campuses with booths where reps would entice young borrowers to fill out applications in exchange for free T-shirts or other giveaways."
No more. Because of provisions in the Credit Card Accountability, Responsibility and Disclosure (CARD) Act enacted in February, 2010, credit card companies cannot:
- Issue credit cards to applicants younger than age 21 unless they can prove they have the financial means, such as a pay stub or bank statement with adequate funds, to pay the bills or, a parent or another adult over age 21 must co-sign the application.
- Increase credit limits on cards that have a co-signer unless the co-signer approves.
- Offer freebies while soliciting credit card applications on or near college campuses.
- Receive details about borrowers under age 21 from the credit reporting agencies.
So how many parents plan to co-sign for their college children to have a credit card? It seems the majority of parents won't. According to a recent online poll commissioned by the National Endowment for Financial Education and conducted by Harris Interactive in July 2010, 61 percent of parents who have a child age 18-20 years old said they would not co-sign for their children to have a credit card. Another 16 percent said they were not sure if they would co-sign for their children to have a credit card.
The credit card legislation makes it harder for college students to get credit cards, but it also offers a teachable moment for parents who want their young adults to learn to use credit wisely. Recent research funded by NEFE and conducted at the University of Arizona shows that parents have the greatest influence on building positive financial knowledge, attitudes and behaviors in their children.
"Even if you have less than perfect credit, it's important to communicate the basics of credit use and responsibility to your child—especially if you're co-signing and liable for his or her account," says Golden.
Covering Credit Basics
A Sallie Mae survey reported in 2009 that just 17 percent of college students pay their balance in full each month, and the average card balance for students rose to $3,173. "As a parent, it's my obligation to teach my son about responsible spending," said Crimmins, who reviewed basic lessons with her son before he could start using credit.
Does your child know how interest rates impact the ultimate price he or she pays for goods or services and how easy it is to fall into debt? Use one of your credit card statements to demonstrate how billing cycles and interest calculations work. And this just got easier because under the CARD Act, these calculations now must be shown on all monthly statements. Next, explain the importance of on-time payments and the negative impact on your child's credit score if payments are late. Discuss credit limits and what fees may be imposed on your child if he or she overspends. Be sure to mention that although it may seem like a compliment when a lender raises your child's credit limit, it also can increase the dangers of overspending and falling into debt.
Finally, discuss the kinds of purchases that are appropriate for credit cards. The NEFE-University of Arizona study found a 26 percent increase in students using one credit card to pay the balance on another during the economic crisis. To prevent your child from resorting to such behaviors, set up a plan to monitor your child's spending, and discuss how your student plans to pay off his or her purchases. And keep the conversation going once he or she starts using the card.
New Jersey resident James Gallo was unwilling to co-sign a credit card for his daughter, who is entering college this fall. Instead, Gallo opted to give his daughter a card linked to his own account so he could monitor her spending habits. "It's like learning to swim," Gallo explains. "First, they go in with a life jacket—a card linked to my account. Then, maybe some 'floaties'—a co-signed card. Then, they go in the water by themselves, knowing that I am by the pool ready to throw in a line when they screw up. Finally, after they swallow a little water, they come out with respect for the water but knowing they can swim alone."
Before You Co-Sign
If you decide to co-sign an application for your young adult, you are putting your own credit at risk. If your student falls behind on payments, your credit score could be affected and you will be responsible for the balance. Make sure your student understands that.
If you are wary of co-signing, there are options.
Prepaid card: To make a purchase, your child must have sufficient funds in the account attached to the card. Otherwise, the transaction won't go through and the card issuer won't extend credit. This should ensure that you and your child's credit scores will not be tarnished.
Bank-secured card: A bank can set up a secured credit card, with the card's credit limit generally equal to the amount of money in your child's savings account. If he or she fails to make the monthly payments, the bank taps the savings account for reimbursement.
"There are options for introducing your child to using credit responsibly," says Golden. "But it's up to parents to start the conversation."
For more tips on talking to your children about money, visit www.smartaboutmoney.org. NEFE is an independent nonprofit organization committed to educating Americans about personal finance and empowering them to make positive and sound decisions to reach financial goals. For more information, visit www.nefe.org.