Student Credit Cards Can Give Your Kids a Financial Education
What do credit cards have in common with beer? When your kids leave the nest for work or college, there's a good chance they won't know how to control either unless they've had some adult guidance at home.
The beer part I leave to you. With credit cards, though, I hope I can help because collectively we adults aren't doing so well in teaching our kids how to handle their plastic. Just 17% of college students pay their balances in full each month and the average card balance is $3,173, according to a Sallie Mae survey.
Lawmakers have made it more difficult for people under the age of 21 to get a credit card. Youngsters now must prove they have income or get an adult to co-sign the application. The card companies may not increase the credit limit without the co-signer's permission and they may not solicit on campus with freebies like pizza and t-shirts.
All good. But don't think for a minute that the card companies can't find your financially challenged teen. I've heard reports of older fraternity brothers or sorority sisters co-signing (although that's a perfect 10 on the stupidity scale). The card companies can still throw give-away marketing parties off campus. And now a little-known company called Higher One is linking a MasterCard branded debit card to student loan accounts. These cards are not subject to the recent financial reforms and can be used at the bar as readily as the bursar.
So don't think for a minute that the government has taken care of your kid's credit issues. Still, the new laws make it more likely that your credit-card seeking teen will have to come through you -- and that's good. But you'll have to decide what you're going to do about it.
Incredibly, 61% of parents with a child 18-20 say they would not co-sign for a credit card and another 16% say they are unsure, according to a Harris Interactive poll for the National Endowment for Financial Education. Yes, co-signing puts you on the hook for your child's financial misadventures. But you're kind of there already, aren't you? To me, this data suggests that a broad number of parents are missing a great chance to help their teens adopt sound credit-card habits.
If you really don't want the exposure, get your teen started down the path of fiscal responsibility with a:
· Prepaid debit card To make a purchase your child must have sufficient funds. Otherwise the transaction gets denied. This ensures that your child's credit score will not be tarnished.
· Bank-secured card Most banks can set up a secured credit card, with the card's credit limit equal to the amount of money in your child's savings account. If your kid fails to make the monthly payment, the bank taps the savings account for reimbursement.
Either is a smart option. But a low-fee, low-limit student card is easier to deal with and will help your teen build a credit score that will grease the wheels to renting an apartment or buying a car later on -- assuming they don't abuse it. Which is why the Bank of Dad will want to monitor things closely until you're sure that your college-aged kids really know how to handle their credit as well as their beer.
If you have a question about kids and money, I'll find the answer. Email me at dankadlec@dankadlec.com
Photo courtesy Flickr user Andres Rueda