Getting your student a credit card
When Mike Sullivan was getting ready to send each of his three children to college, he added one item to the school shopping list: their very first credit card.
"I wanted my children to have the security and comfort of knowing that they had a credit card in the case of an emergency," says Sullivan, director of education at nonprofit credit and debt counseling agency Take Charge America.
He also knew the payment method would help each student build a credit file.
"Helping young people understand how you establish credit is very, very important," Sullivan says. A solid credit score will help them obtain financing and other services, such as a cellphone contract, after graduation. It will also entitle them to better rates, terms and conditions on home, auto and other loans.
Of course, while a credit card can be a comfort, "it is also a risk," Sullivan says. Poor use and a lack of discipline can lead to big financial woes. It can also tank your child's credit score before he or she even nets the diploma.
Here's everything you need to know if you're looking to get your student a credit card before they head off to college.
The law of the land
The Credit Card Accountability, Responsibility and Disclosure Act of 2009, or CARD Act, prohibits financial institutions from offering a credit card to anyone under 21 unless they can demonstrate their ability to make payments or have a willing co-signer.
It also prohibits issuers from sending this group preapproved credit offers and restricts on- or near-campus marketing. (So, no, you don't have to worry about your freshman inadvertently signing up for a credit card to get a free T-shirt as soon as they move into their dorm room.)
The law certainly made a dent in the number of student credit card holders. A December 2013 study on the CARD Act conducted by the Consumer Financial Protection Bureau found that only 14.4 percent of consumers ages 18 to 20 had opened a credit card account in 2012, compared with 33.6 percent in 2007. (The report does attribute some of this drop-off to the recession.)
Still, there are several ways you can help your student obtain a credit card, if so inclined.
The basic options
The CARD Act, for starters, does permit co-signing. This approach, however, can be risky since both parties will be held liable for any debt incurred on the card. Also, any negative information associated with the account will appear on your credit report and your child's.
"If you're co-signing for a loan, you need to assume you are going to be paying off that loan," Sullivan says. "You need to access that account regularly ... so it doesn't also destroy your credit."
Some major issuers have moved away from allowing co-signers to preclude confusion over who's responsible for the bills. Many, however, will allow a parent to add their child as an authorized user.
"If you have no credit file whatsoever, the best way, we think, to get a credit card is to become an authorized user on a family member's account," says Linda Sherry, director of national priorities at Consumer Action.
This option allows you to monitor your child's spending activity. You can also easily kick them off the account, should they abuse their credit card privileges. Plus, authorized users aren't liable for paying off purchases. They should, however, receive credit for the positive information associated with the account, such as a stellar payment history.
Just make sure your issuer reports its authorized users to the credit bureaus. If they're not doing so, "it's like the tree falling in the woods," says John Ulzheimer, president of consumer education at Credit Sesame. " You're not doing anything to build your credit."