Talking Money for Students: Start College and Your Credit Off Right

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Posted: Sep 02, 2009 5:48 PM

Before sending their kids off to college, many parents sit them down and talk about the big issues: Drugs, alcohol, sex.

But what about credit cards? Getting off on the wrong foot when it comes to your credit can have a huge impact on your adult life. A bad credit score can hinder your ability to get your own apartment or even a job after graduation -- goals that are no doubt on every college student's list. High levels of credit card debt are stressful, and an extra burden no student needs in the wake of exams, papers, and, not to mention, the pressures to fit in.

Unfortunately, neither of these consequences seems to warn students away from the free t-shirts and candy that credit card issuers have long been hocking on college campuses. A Sallie Mae study released earlier this year found that the average undergraduate carried $3,173 in credit card debt in 2008, the highest level since the company began collecting data in 1998. This year, however, things are a little different. The Credit Card Accountability Responsibility and Disclosure Act of 2009 (also known as the CARD Act) was signed into law by President Obama in May. It helps to protect consumers of all ages, but also has a special section dedicated to young adults. Beginning in February of 2010, anyone under age 21 applying for a credit card must either show proof of income or ability to repay debt, or have an adult co-signer. That means that credit card companies have little incentive to spend time on college campuses soliciting new customers.

But what about this fall semester?

"Will we see compliance in advance, or will they try to squeeze every last penny out of the student borrowing population? Universities might be tougher in terms of what they allow to occur, but we also have to remember that college campuses are generally part of a town, so the minute a student's toe touches on non-university property, they could be greeted by a credit card company," says Adam Levin, co-founder and chairman of credit.com.

That means students still need to be prepared, and as a parent, the ball is in your court. Here's how to approach the situation:

-- Talk it out. Don't use the CARD Act as an excuse to avoid the situation. Sure, the temptation of cards will be scaled way back, but it's not eliminated completely, and your student has plenty of time to slip up before February. Sit down and explain how credit cards work, from interest rates to credit limits to the importance of reading the fine print. "I really encourage young adults to learn to read the disclosures, in everything, not just credit cards. That's why you're given it. I don't care if it's a credit card, mutual fund or rental agreement for an apartment -- you need to read and understand the terms," says Michael Wagner, author of "Your Money, Day One: How to Start Right and End Rich." Discuss minimum payments as well, and if it helps, run a few numbers with them, showing the cost of making only the minimum payment on a balance.

-- Consider a preemptive strike. You may want to get your student a credit card now, before the new law takes effect. It will prevent you from having to co-sign, meaning any mistakes made by your student won't darken your credit history. Let the conversation you have with your son or daughter be your guide, and if you feel he or she is ready, then proceed. I am a firm believer that college students should have a credit card. If used wisely, it's a tool that helps them establish a credit history, not to mention they'll be prepared in case of an emergency. But only you know whether your child is responsible enough to handle a credit card, or if you need to lend a hand. If you have doubts, start small by adding him as an authorized user on your own card, says Levin. "That way, they are a little more restrained in the way they spend, and the parent has the opportunity to participate in the process with them, and help them build a solid understanding. If they're an authorized user, you get the bill. If you're a co-signer, you often don't." Being an authorized user on your card will also help her build a credit file.

-- Set limits. If you want to provide your student with spending money while they're away at school, that's fine, whether you do it by adding them as an authorized user and paying the bill off each month or giving them good old-fashioned cash. (Although, I have to tell you, I think college students can and should have a part-time job to supplement any help from mom and dad.) But set a limit on how much they can spend each month, and if the pot runs dry, don't bail them out. Sending more funds when the initial budget is exhausted sends the signal that you're their financial cushion, no matter how much they spend or what they spend it on.

If they choose to get a card in their own name before February, you can still help them set limits for themselves -- and the bank can help as well. Many people don't know this, but you can have a bank lower your credit limit to an amount you feel more comfortable with. It's an added precaution, and it helps anyone who can't keep their spending in control. "A credit card isn't supposed to subsidize your income. Your paycheck is supposed to support you. Don't bridge the gap with your credit card," says Wagner. With reporting by Arielle McGowen