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Credit-cards tips for college students
While most college students don't need a credit card, they want one and can potentially benefit from owning one.
Until a few years ago, it was easy for college students to apply for credit cards. Credit-card companies set up tables around campus where students could sign up while also receiving freebies ranging from T-shirts to pizza.
The results often proved disastrous, with students running up credit cards to the limit. Unable to make the monthly payments, they ended up with a poor credit score that followed them into the future.
Many colleges stopped allowing credit-card companies on campus, but there was wider concern that more protection for students was needed.
The Credit Card Accountability, Responsibility and Disclosure Act of 2009 requires banks to provide a reason for participating on colleges campuses and events. It also bars them from giving gifts or promotional items to entice students to take on debt by applying for credit cards.
The Credit CARD Act has made it more difficult for college students younger than 21 to get a credit card. Underage students are required to have a co-signer or to demonstrate an acceptable level of income.
While most college students don't need a credit card, they want one and can potentially benefit from owning one, according to Andrew Schrage, of Money Crashers, a personal-finance website.
"I think there is one key lesson to teach a college student: If you don't have the money to pay for a purchase in full by the time the bill comes in, then you just can't afford the item.
"College students should use a credit card as though it were cash currently in their pocket and not a cash advance," he says.
The most common option is for parents to be co-signers. It is a strategy that Mitchell Weiss, an adjunct faculty member in the University of Hartford's Barney School of Business and author of "Life Happens: A Practical Guide to Personal Finance from College to Career," recommends against.
"As a parent with two grown kids, a finance background and more than 30 years in the financial services industry, I have never nor would I ever co-sign a credit application for anything other than a first apartment lease," he says.
Weiss has two reasons for this. The first is, if the student fails to honor his or her credit-card obligations, it means the co-signer — the parent — is on the hook for the bill and his credit record is negatively affected.
His second reason is that there are several alternatives, including arranging for a separate card for the student under the parent's credit-card account, a method Weiss used with his son.
"I made sure the ground rules were clear — that the card was to be used for certain types of purchases and for a maximum value each month. Otherwise, the money would come out of his savings account," Weiss says.
Secured credit cards, which are guaranteed by a cash security deposit that equals the card's limit, are another option to help establish a credit history.
Even with secured cards, though, there are negatives.
"It's important to understand that the security deposit is being used to pay the monthly bill," Weiss says. "The cardholder would have to place new money on deposit every month to cover. It is the consumer's responsibility to pay the monthly charges so that the security deposit isn't being used to pay the monthly bill."
Debit cards are another option; the cardholder can purchase only up to the amount available from a linked checking or savings account. If the card owner has opted out of his or her bank's overdraft protection, however, overdraft charges could be triggered.
Another debit downside is that unlike credit-card customers, there's no recourse to credit-card holders who dispute a charge on their account.
But whether it's debit or credit, Schrage advises students to think of life after college and prepare for it in all ways, especially financially.
"Ultimately, if your credit report show signs of responsible credit use and you get a head start at an early age, it can have long-lasting positive effects on your financial future," Schrage says.