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As college students work their way toward adulthood, it's reasonable to ask whether they should be given credit cards. On the one hand, it's generally a good idea to build up a credit score while they're still in college in order to make getting an apartment, opening a new credit card, or even finding a job easier. On the other, inexperienced users can dig themselves into deep holes. A growing number of families are forgoing credit cards for the collegians: the number of college students who have at least one credit card has been dropping steadily for the past few years, down to 35% in 2012. Of those student cardholders carrying a balance – a full two-thirds of them – the average was $755.
It’s true – credit cards can be a slippery slope for students just learning to manage their money. Still, there can be major benefits to card ownership. So what’s a parent to do? Is setting your college student up with a credit card a good idea?
The benefits of having a credit card in college
Student credit cards aren’t just a luxury – they serve an important educational purpose. Having partial responsibility for a card while they’re young helps train students to use one correctly later in life. In addition:
A long history is a good history. According to FICO, the length of your credit history makes up 35% of your total credit score. FICO will weight other factors, like your payment history, more highly if you’re just starting out, but when it comes time for your students to apply for a mortgage or auto loan on their own, having a longer history will be to their advantage – if they’ve used it wisely.
Credit cards can help during emergencies. When your student is away from home, they may need some extra cash now and again, whether it’s for an unexpected flat tire or a large prescription co-pay. A credit card can be a great insurance policy, provided you both agree on what constitutes an emergency, and who will eventually pay for it.
Of course, for a credit card to teach your student financial savvy, they have to be careful with it. And what if you suspect they might be less than dependable when it comes to money?
It's not all roses
Unfortunately, not all college students – and not all adults – use credit responsibly. If you’re a co-signer on your student’s credit card, you’re legally responsible for unpaid debts on their account, which could damage your own financial goals, including retirement. And even if your child is eligible for their own card, consider whether you’ll feel obligated to bail them out if they misuse it.
The burden of credit card debt still hurts your student, even if they’re not the one paying it off. Financial mistakes they make in their late teens could remain on their credit report for years. There are definitely other ways of teaching students about money – ones that don’t involve 20% interest rates – including setting them up with their own bank account and debit card, or asking they take charge of some of their own expenses, like their cell phone bill.
The law's on your side
Good news: Along with limiting predatory fees and other credit card gotchas, the Credit CARD Act of 2009:
Makes it hard to get a credit card without an income. The law prohibits card companies from issuing unsecured lines of credit to people without a full-time income or access to household income. Unless you have an income or are a stay-at-home spouse with access to the household's finances, you'll need an adult co-signer. If you don’t agree to co-sign, your kid will have a hard time getting credit, and if you do, you can keep an eye on their purchases.
Limits credit card issuers' ability to market to students. Remember the free t-shirts and pizza you were offered during Welcome Week, just for signing up for a credit card? Those days are over. While card companies can still market to students, and many still do, there are no tempting freebies.
No matter what side of the credit or no credit debate you pick, thanks to the CARD Act, your student is more likely to need your input before making important credit-related decisions.
So what's a parent to do?
It's probably a good idea to co-sign a credit card for your student. This'll help build credit for their adult life. Whether or not you let him use it, though, is a more personal decision. A low credit limit on your student's card can teach her responsible use and provide a safety valve during emergencies, but if she isn't ready for it, credit card mismanagement can tank her credit score. If you don't think your child is ready for a credit card, don't let her use it. If you're not sure, try setting a low credit limit and see how it goes.