These days, applying for college can be easier than applying for a credit card. When Spencer Shulem tried to get a credit card at age 18, he quickly discovered how difficult it can be. He applied to a handful, and despite having a job and earning $30,000 a year, he was rejected by all of them due to a “thin file,” as he was told.
When he was 19, he elected to get a secured credit card. He gave his card issuer $500, and he was given a credit limit of $500. “Everything revolves around credit now,” says Shulem, who is now 20 and lives in Santa Barbara, California. “Leasing a car, renting a place — it all needs higher and higher credit scores that take years to build. Out of college, I’m going to still not have a credit history that’s worthwhile.”
Granted, Shulem was never an ordinary college student. He isn’t even a college student, having recently suspended his studies at Santa Barbara City College due to starting Tribe, a software company. In fact, he has had a business of some sort since he was 13, mostly working in the technology field and doing things like designing apps. Still, many young adults and their parents wrestle with the credit card question: Should you get one when you’re in college?
If your answer is yes, can it actually be done? After all, as Shulem says, “It’s honestly way harder to get a credit card than it used to be.”
This is true. The Credit CARD Act of 2009, among other things, forbids financial institutions from offering a credit card to anyone under 21 unless they can prove their ability to make payments with their own income (which didn’t help Shulem) or they have a willing cosigner. But there were good reasons for the Credit CARD Act. Before the law changed, a lot of 18-year-old college freshman, with their newfound freedom, were using their plastic to buy a lot of late-night pizza, among other things, and getting deep into debt fast.
So if you want your college student to have a credit card, here’s what you need to know:
You have to be willing to help. If you want your child to start building credit before age 21, you’ll have to cosign on a card or add them to your account as an authorized user.
Kari Luckett, an editor with CompareCards.com, explains the difference: “If a parent cosigns for a student, the parent would be held liable should their child stop paying their bill. If a student is added as an authorized user on their parent’s account and the parent stops paying, it will hurt the student’s credit, too.”
The bottom line: You’re linking your credit history with your kid’s. Maybe everyone will win from this arrangement. But everyone could lose, too.
You’ll also want to take a good look at what credit card your kid wants to apply for. Is it one with a lot of high and unnecessary fees? Are there any perks, like rewards points, which might make it more attractive? Discover, for example, has a good grades reward program for students who sign up for a credit card. Cardholders get a $20 cashback bonus if their grade-point average is 3.0 or higher every year they’re enrolled in school for the next five years.
Of course, if your kid misuses the credit card and spends hundreds of dollars in the next year or two on frivolous expenses, that extra $20 a year in cash back might seem like a cosmic joke. Which brings us to the next point …
Teach your kid how to use a credit card. Even if your responsible kid waits until age 21 to apply for a card, you should explain at length what he or she is getting into. If you just run through some cursory details while your child nods blankly, this is the equivalent of sending him or her into a bear cave, slathered in honey.
Dana Twight, a parent and certified financial planner in Seattle, recommends showing your child everything that goes on in a typical transaction: “Buying the item, seeing it show up on the statement, calculating the interest per day and when it begins. I guess that could all be done online, without visiting a store together,” she adds.
Twight says ideally, parents would go through the entire cycle and spend about two months on this credit card tutorial. But she didn’t do this with her daughter, who also didn’t get her credit card until after she graduated from college.
Whenever your kids get credit cards, teaching them everything you know — and then some — is crucial, Twight says. “Many under-30s I have met do not know how to keep and maintain good credit, nor how important this score is to their future,” she says, adding that the consequences of a terrible transaction can remain on your credit report for seven years.
In other words, you can spend more than seven minutes teaching your kids about credit cards.
Consider your kid’s maturity level. Yes, having credit is important to everyday life, but when your kid is 21, chances are, he or she will be a junior in college and will have two more years of not quite being in the real world yet, with some time to build a credit history. So if your kid is 18 or 19, and you’re reluctant to saddle him or her with a credit card, you may want to try a debit card first.
The debit card first approach is what Timothy Schumer, a Syracuse, New York-based counselor with ClearPoint Credit Counseling Services, is doing with his 19-year-old son.
“College kids lack life experiences, can easily be manipulated and deceived, as they are not looked upon as consumers but targets by credit card companies who truly do not seem to have the best interests of the student in view,” Schumer says.
He also has a 24-year-old daughter. He encouraged her to wait until after graduation and finding employment until she applied for a credit card.
Of course, college students can misuse a debit card. A few overdraft fees won’t hurt their credit, but especially if they come out of your bank account, you may discover that you know even more curse words than you thought you did.
Another danger of debit cards is theft, says Coleen Pantalone, a finance professor at the Northeastern University D’Amore McKim School of Business in Boston.
“As long as there is money in the account or overdraft privileges, the thief can keep taking money out,” Pantalone says.
Pantalone’s advice fits just about every scenario, whether your college kid has a credit card, debit card or is relying on a wad of cash in a shoe box: “Set the boundaries and monitor. Learning how to manage money responsibly is an important part of growing up.”
It sure is, and on the plus side, the hassle of applying for a credit card may end up helping your college kid learn how to manage money more responsibly.
Shulem, for instance, dropped his secured credit card after several months because he was not thrilled with the 29 percent interest rate. But he was able to use the card to help him build enough of a credit score to get a car loan, and paying that off is helping him build more credit.
But financial lenders, he has come to realize, “aren’t especially nice to new credit people.”
Of course, sometimes they aren’t especially nice to people with a long history of credit. See, he’s learning stuff already.
More from U.S. News
12 Habits to Help You Take Control of Your Credit
4 Credit Lessons Every Graduate Must Know
12 Millennial-Inspired Ways to Spend Less
Should Your College Kid Get a Credit Card? originally appeared on usnews.com
