Credit Cards
Activity
Credit Cards on Campus
Federal legislation that went into effect in 2010 has put restrictions on credit cards for college-aged students. Applicants under the age of 21 must either have a parent or another adult co-sign in order to obtain a credit card, or they must be able to prove they have sufficient income for the debt they can carry. Nevertheless, college students still continue to receive solicitations, and the restrictions are proving simple to work around. By some reports, students are using their student loans as evidence of income to qualify for a card, and any adult over 21 is eligible to serve as a co-signer.
We live in a credit card nation. Most adults have credit cards, and students express frustration when their parents use Visa, MasterCard, Discover, or American Express for most of their family purchases, then tell their students not to get a credit card. Students are exaggerating only slightly when they say, "Everyone has credit cards!"
Indeed, many parents want their college students to have a credit card in case of a financial emergency or to build a credit rating for the future. Nationally, four out of five college students have a credit card, and half have four cards or more. A 2010 survey conducted by Boynton Health Service indicated that a quarter of U of M students carry some level of credit card debt, and of those, more than a third owe $3,000 or more.
Parent: "We were greatly disturbed last week when our son received two new credit cards, one rejection, and one acceptance that needed more information. We told him we didn't want him to have any credit cards, and he agreed because of two friends he has. One has struggled with credit card debt because of the ease of purchases ever since starting college. The other kept telling his friends not to let him charge another thing because he couldn't handle it. He finally had a store clerk cut up his card for him. I don't believe a college student is in a very good position to have credit cards, as their expenses are so high and income pretty menial. Getting in debt comes so fast and easy; getting out is a long process. We are dead against his having a credit card."
Used carefully, credit cards are not a problem. The troubles mount, however, when students:
- don't fully understand the terms of their card
- sign up for multiple credit cards in order to get the purchase points or other incentives
- overspend their budget because the credit card allows them to buy now, even if they don't have the funds
- fail to pay their charges in full each month
- have a different interpretation than their parents of what constitutes "emergency" use of the card
While there are credit card providers that will work with new card holders to teach good practices, there are also some providers that charge sign-up fees, make it difficult to understand their terms, or establish barriers for easy payments. Students need to be alert for the conditions of any credit card offer they are considering.
Parent: "My daughter was victimized by a company that had their processing headquarters in Iowa but their bill payment address was in California. Their customer service and charter were in Delaware. They claimed they didn't receive her payments on time, even when she mailed the payment on the same day she received the bill. Unfortunately, I didn't explain to her what types of scams could be out there. I didn't really know too much about the scam she was hit with. We did discuss the dangers of credit card debt and how it can quickly overwhelm a person."
Parent Perspective
A few years ago, we asked U of M parents, "What are the benefits and costs of credit cards for students and the University?"
According to parents, the primary benefits are:
- Credit cards can be helpful in emergency situations.
- They help students establish credit and learn financial responsibility.
- Credit cards are convenient and often are safer than cash.
- For students studying abroad, credit cards were described as a necessity.
- Credit cards are useful when ordering from Internet sites.
- Credit cards can lead to a bad credit rating.
- Students could be saddled with major debts and high interest payments.
- Financial problems could cause students significant stress and may lead to health problems or dropping out of school.
Parent: "We consistently told our daughter not to get a credit card, that she should only use a debit card -- so far this year she has actually stayed below her budget and has extra money for next year by not getting 'ahead' of herself when heading out to the Mall of America or dinners with friends by putting things on a credit card that she couldn't afford later."
The drawbacks include:
Several parents noted that other financial options could offer the emergency and convenience benefits without the drawbacks -- checking accounts and debit cards or a credit card in the parents' name might prevent running up major debt levels.
Parent: "My daughter has been on my credit card since she was 16. I did this intentionally so that I could monitor her usage of it. We made it a policy that if she charged anything, she would pay me before the credit bill came. As a result, I think she has learned how to use a card responsibly. She does not have any other cards at this point but has been talking of getting one in her own name."
Encouraging Smart Decisions
Different families choose very different methods for encouraging good practices related to credit cards. Some parents put their student on an account in the parent's name, and the billing statements are mailed to the home address. Parents ask their student to clear purchases with them before using the credit card; in an emergency, the student may use the card, but must notify the parent as soon as possible afterwards. Each month when the bill arrives, the parent and student will review the charges together
Parent: "When the girls were seniors in high school, I arranged for them each to have a credit card. The No. 1 rule was that it was paid in full every month. If they needed something for school or a special outfit or gas for the car, they would charge it. I was usually asked in advance if they could charge. When the bill came, we would go over it and decide which charges they or I were responsible for. They also had a checking account and savings account. In order for them to have practice in handling their money and accounts, I would give them a check to deposit into their account to cover my portion of the credit card bill. Then they would write the check out to cover the credit card bill and mail it. I also would have them help me on occasion with paying the family bills -- things like balancing the check book, writing checks, and keeping the ledger of monthly expenses."
Other families give their student more leeway in deciding what to charge or how to use the card.
Parent: "We discussed financial responsibility with our daughter before she started the U of M this fall. We got her first credit card with only a $500 limit and plan to keep it at that. We made it clear she was responsible for certain items, such as entertainment, some clothing, etc., and made clear what we would pay for. To this point, she is doing pretty well."
Parent: "We have discussed financial issues quite in depth with our student, and she has an understanding of her financial responsibilities and knows that if she should opt to get a credit card, she is the one responsible for its proper use. We have discussed things such as no-fee cards, billing cycles, buying on a card only what you know you will have resources to pay for when the bill comes due, and the value of establishing a good credit rating."
In other families, students choose not to have a credit card.
Parent: "I tried to demonstrate good financial management for my student in the handling of my own finances. We discussed his need or not for a credit card. He chose not to have one. We discussed other money management and keeping track of spending and bank balances. I provided a format for him to use for tracking his expenses and balances remaining in his account."
Credit Ratings
More about FICO scores (credit ratings)
Printable brochure that covers the basics of FICO scores
You can receive one free estimate of your credit rating each year, find out how by clicking here.