Parents might be apprehensive about giving their college student access to a credit card, but if they don’t, it could cause problems down the line. Those who delay building a strong credit history may have trouble qualifying for credit cards and loans or even renting an apartment later on.
With planning and education, students can use credit cards to build a strong record of credit in college and be ready for real-world financial situations in time for graduation.
Students and Credit Cards — a Complicated Relationship
Before the Credit CARD Act of 2009, credit card companies were a fixture on college campuses, marketing heavily to students in hopes they would become immediate — and potentially lifelong — customers.
[Read: Best Student Credit Cards.]
Since the act, which set rules on the extension of credit to people younger than 21 — including limiting marketing on college campuses — student exposure to card companies is less pervasive.
“It’s good those days are past,” says Matt Schulz, chief industry analyst at personal finance site CompareCards by Lending Tree and a former U.S. News contributor, who admits he racked up thousands of dollars in credit card debt as a student and just after college.
But he insists that the importance of building credit during the college years should remain a priority for students.
“That allows them to make small mistakes when the stakes are small, so they can learn lessons that will help them in the future, when the stakes get higher,” Schulz says.
Despite the marketing restrictions on credit card companies, many students have their own credit cards — 56 percent of them, according to a 2016 study from Sallie Mae. And almost 60 percent use the cards as a way to build credit, according to the survey of students ages 18 to 24.
How to Get Started in Credit
For parents, there is no one way to figure out whether your college student is ready for a credit card. A common starting point is to allow a high schooler to use a debit card as a primary method of payment, which could carry over into the first couple years of college. In fact, 85 percent of college students surveyed by Sallie Mae had debit cards.
“When you’re just getting started, it’s really important to know yourself or, if you’re a parent, know your kid and understand whether they are someone who is likely to handle this credit limit without going on a spending spree,” Schulz says. “Are they somebody who is able to make payments every month without forgetting or being late? It’s really important to understand who you are and what you want from the card before you apply.”
One persistent myth held by some parents is that their children are showing fiscal responsibility if they have no credit card during college. While limiting the chance for crippling debt at a young age is a good idea, students might graduate from college and need a parent to co-sign for an apartment because they don’t have a credit file, says Tim Ranzetta, co-founder of Next Gen Personal Finance, a nonprofit that offers resources for teaching personal finance in schools.
Some students are able to get credit cards on their own if they have income from a part-time job. But they might not know enough about interest rates, revolving debt, credit reports and credit scores to make wise decisions.
That’s where parents can step in to provide guidance. In fact, according to a recent U.S. News survey, 40 percent of college students were not taught about credit cards before getting one.
“It does depend on the person, but generally, I’d recommend that somebody at least have some experience with credit before they get out of college,” Schulz says. “That transition from college into the real world is daunting and intimidating enough. If you don’t have any sort of real-world financial experience, even if to a small degree, it can make that transition harder.”
The most common ways to get a student started on credit cards are adding them as an authorized user on a parent’s credit card or encouraging them to get a secured credit card or an unsecured student credit card.
Students as Authorized Users
Making a student an authorized user on a parent’s credit card can allow the student to pay for items with the card but without the ultimate responsibility of monthly balance payments.
If this arrangement is made in high school, the student can become comfortable with using the card while his or her parents are around to answer questions, Ranzetta says. Parents also get to see what their children are purchasing.
“If they’re responsible, get them started while living under your roof,” Ranzetta says.
Making children authorized users can help them build a strong credit history, provided that the card issuer reports that information to credit bureaus. If you use your card account responsibly and make a child an authorized user on your account, you can “transfer the good history on that card to the authorized user’s credit. That can be a good jump-start,” Schulz says.
On the negative side, an authorized user with access to a credit card has buying power, but the card issuer won’t ultimately hold them responsible for charges. That can be a problem if a student racks up huge charges without a way to pay them back.
“An authorized user legally isn’t liable for those balances,” Schulz says. If the student puts a $5,000 charge on the card, “mom and dad are the ones legally stuck with that bill.”
Parents should talk to their kids about the responsible use of credit before allowing them to become authorized users. Discuss credit limits, and most importantly, make a plan for how they’ll pay off their charges each month.
Also, authorized users benefit from the strong credit history only as long as they’re on the card. If the user is removed, that history goes away, Schulz says. In addition, an authorized user can be negatively affected by a primary card owner who stops paying the monthly balance. As authorized user status can be fleeting, it’s a good idea for students to get a card account in their own name once they’ve proven themselves responsible.
[Read: Best Secured Credit Cards.]
Secured Credit Cards for Students
Secured credit cards are designed for consumers who likely can’t get unsecured cards because they have no (or bad) credit history. These cards are secured with a cash deposit from the card owner but otherwise work like a regular credit card. They can be ideal for college students who wouldn’t otherwise be approved for a credit card.
“Secured cards minimize the risk for pretty much everybody involved,” Schulz says. “You put a little bit of money down, you get a credit card account and start using it to build up your credit. Because the credit limit isn’t going to be very high, there is only so much damage that you’re going to be able to do. It’s a good set of training wheels to help you get more comfortable with credit.”
Deposits on these cards are usually about $200 to $500, which often matches the credit limit on the card. These are not prepaid cards, though — the owner still has to make monthly payments while the security deposit acts as a backup in case of default. Secured cards often have an annual fee as well.
“Beyond the deposit, most of these secured cards act exactly like any other credit card would,” Schulz says. But it is important to make sure the credit card issuer will submit the payment history to the credit reporting bureaus.
Some secured cards offer tools, such as text alerts, that help students learn how to responsibly use the card, Schulz says.
How Student Credit Cards Can Help
Student credit cards can be a good choice because they often accept students who have limited or no credit history, but are usually unsecured, so they don’t require a security deposit. Like secured credit cards, they may have lower credit limits than other types of cards, which can limit the potential for racking up debt. And they usually don’t have annual fees.
Typically, student credit cards are designed to help students get started with credit and may have credit-building tools available, such as free FICO score and credit report access. Some offer cash back, travel rewards and even a statement credit for good grades.
When Are Students Ready for a Credit Card?
Previous tests with cards, and other responsibilities, can help you determine credit card readiness.
“If you have an impulsive child on your hands, then it’s a recipe for disaster,” Ranzetta says. “You have to know your child. Most people have a good sense on what their child’s habits are. Avoid that train wreck.”
Schulz compares the credit card decision to the issue of whether to give a child the family car. “If you have one kid who always fills the tank up with gas and never misses curfew, you’ll probably give him the keys again. If a kid always comes home late with scratches on the car, it’s probably good to keep the keys from him,” Schulz says. You can also watch how a child handles an allowance or earnings from a part-time job.
Regardless, you’ll want to make sure the card’s credit line is enough to handle emergencies but will keep any potential shopping sprees to a minimum. Ideally, students should aim to use less than 30 percent of their total credit limit, then pay off their statement balance each month.
[Read: The Best Starter Cards for Building Your Credit.]
Risks and Rewards of Credit Cards for Students
For college students, the upside to responsible credit card use is clear: It lets them build a strong credit history and learn to responsibly handle financial situations at a young age. But this doesn’t happen overnight.
“You have to emphasize education, and parents’ role in that is so critical,” Ranzetta says.
Whether parents feel comfortable making a child an authorized user on a card or supporting his or her application for an unsecured card, it’s best if they have an ongoing conversation about responsible credit card use.
Students, too, need to ask for help and not make assumptions or believe myths about how credit works.
Schulz looks back at his own credit card experiences as a young adult and realizes a little less freedom might have helped him avoid a high debt load right after college. “If I had some guardrails on what I could have spent, that would have been helpful.”
More from U.S. News
Credit Cards 101 for College Students
What College Students Need to Know About Credit Card Fraud
Ways to Build Credit as a Student
Should College Students Have Credit Cards? originally appeared on usnews.com
