Beware Of Student Credit Cards
The average undergraduate leaves school with a debt of $18,900. That's up 66 percent from five years ago, according to a new study by loan provider Nellie Mae. A large part of this is, of course, student loans, which more and more students report needing these days, thanks to ballooning tuition bills.
However, The Early Show financial advisor Ray Martin reports, a growing part of this debt is unnecessary; it's a result of four years of charging pizza and shoes and booze on new credit cards.
College students are prime targets for credit card companies, which set up tables on campus and entice students to sign up for new cards with promises of free T-shirts or other goodies. Unfortunately, many students eagerly apply for credit and use it unwisely.
Students double their credit card debt and triple the number of cards in their wallets between the time they arrive on campus and graduation, Nellie Mae found. Another scary finding: by the time college students reach their senior year, 31 percent carry a balance of $3,000 to $7,000.
So what's the message here? Don't allow your child to get a credit card? Sorry Mom and Dad, once your kid turns 18, he or she can get a card without your permission. However, if the card is handled properly, your student will be glad to have a credit history upon graduation. The "Motley Fool" Web site - a financial education site - writes:
"Making the leap from college to the real world is going to be a whole lot tougher without a credit history. Without a credit card, you can't rent a car or get a good car insurance policy. You could get turned down for an apartment when a potential landlord checks your credit history and finds nothing there. Or you could be asked to shell out an enormous deposit before moving in. Once you graduate, getting a credit card will be more difficult. Let's say a pre-approved credit card offer does comes your way. There's a good chance you'll be turned down. The reason? The lack of a revolving credit account on your credit report."
Martin suggests allowing your high school senior to sign up for a credit card so you can closely monitor how he uses it and be on hand to discuss managing credit.
Student Credit Cards
A college freshman is offered eight credit cards in his or her first semester. The average graduating senior has six cards in his or her name. Martin says that students only need one credit card. Yep, that's it, one.
Most students will receive offers for "student credit cards." These are simply cards that companies market specifically to students. The cards typically have lower credit lines - $500 to $1,000 - and higher interest rates. Motley Fool found that the average rate on these cards range from 10 percent to 19.8 percent.
"Those rates are OK - not as good as adults with good credit, not as bad as people who have already mishandled credit. All of the ones at the low end of the scale are variable rate cards, so you can expect them to rise," the Web site reports.
Just as you would with any credit card, look for the lowest interest rate possible, a low or no fee card and a 25-day grace period. Keep the card limit low, even if offered a higher line of credit.
Prepaid cards
Parents who are concerned about their college student falling into debt can consider giving their child a pre-paid card. This safety net allows parents to set a dollar amount on the card so nobody has to worry about the student driving up a large balance.
Never co-sign on an account
Whatever you do, however, never ever co-sign on a student's account. You don't want your student's financial mistakes appearing on your credit report.
Twenty-seven percent of students use a credit card to help finance their education. These students wind up with significantly more credit card debt when they graduate. The Nellie Mae study found that students who charged tuition and other related expenses left school with a credit card balance of $3,400. This is much higher than the average graduate's balance of $1,600.
Martin says paying for school with credit cards should be a last resort. Unlike student loans, you have to begin paying back credit cards immediately and you face a much higher interest rate.
The impact of debt
How does all of this debt impact your student? The biggest concern is how the debt and its management affect the credit report and the credit rating.
Nellie Mae found that over half of all graduates with debt feel burdened by that debt. And, for the first time, the study discovered "the probability of owning a home decreases by a small amount as debt levels increase. Family structure, age and income remain the most important determinants of home ownership, but an additional $5,000 of debt reduces the probability of owning a home by about one percent."