By Deborah Hamburger, Volunteer Coordinator for Pro Bono Services
Back in the 80’s, when I was a college student, I could have wallpapered my entire dorm room with the vast number of credit card offers that came my way. During high school, the moment the credit card companies got wind of the news that I had taken my SAT’s – which meant that I would most likely be applying to college – they attacked in force. In fact, according to one study conducted in 2008, college students receive upwards of 50 credit card solicitations per semester. That means that the typical college student is the recipient of more than 400 credit card offers over the course of his college career!
The results of this marketing blitz? The average undergraduate student owns 4.6 credit cards and carries a record-high balance of $3,173. Twenty percent of graduating seniors carry balances greater than $7,000. When you add student loans and a weak job market into the mix, you can clearly see why college students are in financial crisis and why default and bankruptcy rates among this demographic group are skyrocketing.
Fortunately for parents of teens poised to enter college, Congress recently enacted legislation that places strict limitations on the marketing and issuing of credit cards to young people. Under the terms of the Credit CARD Act of 2009, credit card companies can no longer offer free gifts on college campuses as inducements to sign up for a credit card. Additionally, and perhaps more importantly, credit card companies cannot open an account for a student under the age of 21 unless a parent co-signs or the student can prove that she or he has enough income to repay credit card debt. In the one year since the CARD Act has been in effect, the total of new accounts opened by students has dropped by 17%.
Does this mean that your child should not have a credit card when heading off to college? Of course not. There are many good reasons for college students to have a credit card, including having funds for emergencies, being able to use the warranty protections that credit cards offer, and avoiding the necessity of carrying large amounts of cash to cover purchases. It is critical, however, to discuss with your child how and under what circumstances the card should be used.
Here are some helpful tips for parents, adapted from an article by Connie Prater at www.creditcards.com.
- First, make sure your teen understands how credit cards work. Stress that credit cards are loans that must be repaid and that the consequences of late payments and non-payment are severe. Most credit cards have APR’s in the 22 – 29% range for late or missed payments. Let them know that if they do not pay off the balance in full each month, every purchase they make from that moment on will begin to accrue interest charges from the moment of purchase.
- Limit your teen to one low-APR card. Most credit card companies will allow you to make your child an authorized user on your existing card and will permit you to establish a different, lower credit limit for your child. Be aware, however, that even though this card is in your name and not your child’s, most credit reporting bureaus will report it on your child’s credit report as well as yours. So if your payment history on this card is poor, you will be doing a disservice to your child by linking his or her credit history to your card.
- Discuss your expectations for the use of the card. Talk ahead of time about what charges can be made without parental permission and which transactions can be made only with your prior consent. You may choose to put a weekly limit on spending or, alternatively, establish a buying cap by agreeing that purchases over a certain amount must be pre-approved by mom or dad.
- Monitor your teen’s purchases. Many companies offer a service which will send you a text or email alert whenever the credit card is used or if purchases exceed a certain amount. This will also help you detect any unauthorized charges which may indicate that you have been the victim of identity theft.
Following these tips will not guarantee that your child won’t land in financial hot water. But studies have shown that parents have the greatest amount of influence on a young person’s credit card behavior. Children learn from their parents about credit card usage through direct teaching of its advantages and disadvantages, as well as by observing their parents’ behavior. Make sure that you begin the conversation with your children at an early age and model responsible financial behavior in order to start them on the path to a financially successful future.
By Deborah Hamburger, Volunteer Coordinator for Pro Bono Services (financial literacy programs and legal services), Jewish Community Services, Baltimore, MD
Sources and Additional Resources:
- United College Marketing Services, “College Credit Card Statistics,” 2008, http://www.ucms.com/college-credit-card-statistics.htm
- “How Undergraduate Students Use Credit Cards: Sallie Mae’s National Study of Usage Rates and Trends,” 2009, http://static.mgnetwork.com/rtd/pdfs/20090830_iris.pdf
- Federal Reserve Board of Governors Report to the Congress on College Credit Card Agreements, July 2011, http://www.federalreserve.gov/boarddocs/rptcongress/creditcard/2011/downloads/ccap_2011.pdf
- Tips: “Law May Force Parents, Children to Talk About Credit Cards” by Connie Prater, http://www.creditcards.com/credit-card-news/credit-card-law-college-students-parents-1282.php
- Dr. Phylis Mansfield and Dr. Mary Beth Pinto, “Researchers Probe How Young Consumers Learn To Use And Misuse Credit Cards,” November 24, 2003, http://www.psu.edu/ur/2003/creditcardmodel.html
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