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The Money Mom: Credit Cards for College Students

Credit cardsEarlier this year, the CARD Act went into effect, changing the credit card market as we knew it. Many of the changes were in favor of the consumer: a grace period is now required on interest rate increases, there are new notification rules, and creditors have to consider payments made before 5pm on the due date as on time.

Another provision, though, was a huge game changer for college students: In order to get a credit card under age 21, you have to prove you have the income to make the payments, or get a co-signer.

This, I think, is good, for a lot of reasons. In years past, we’ve seen campuses crammed with credit card lenders, offering t-shirts and snacks and movie tickets to anyone who passed along their personal information or signed up for a card. There wasn’t a whole lot of education involved, and as a result, students were graduating with an average of $4,138 in credit card debt. Not good.

But not building a credit history isn’t good either, and to do that, you need to borrow money responsibly. College is a good time to start. So what’s the solution?

First of all, I don’t think it’s a good idea to co-sign on a loan or credit card for anyone, for any reason. When you co-sign on a loan or credit card, you’re putting your credit on the line. If the person you’re signing for – in this case, your son or daughter – slips up by paying late, missing payments altogether, or defaulting, your score is going down the tubes right along with theirs. And in some states, creditors can collect the unpaid debt from you without first trying to collect from the borrower, which means that in addition to a bruised credit score, you could be stuck with the balance – as well as late fees and collection costs. Federal Trade Commission studies have shown that when co-signed loans go into default, three out of four co-signers end up paying the loan.

In this case, if you want to help your student start building a credit history this coming semester, and he or she doesn’t qualify for a card on their own, your best bet is adding them as an authorized user on your card. From that position, they’ll get their own card, which will go on their credit file. The charges will come on one bill, however, so you’ll be able to collect the money and make sure the payment gets in on time each month. You can also monitor his or her spending, if you’d like, or, with some cards, set the credit limit lower to keep things in check. Keeping the coupon book in your hands means you get to protect your credit, and give your kids the opportunity to build theirs.