The college years are a time for students to flex their independence, but they typically need financial support. A credit card is a convenient way for them to make purchases while developing financial literacy. But, is giving a credit card to a college student just asking for trouble?
GoodCall assembled a team of financial experts to address the pros and cons.
Yea or nay?
First, know that your college kid shouldn’t be able to get a credit card on their own, according to Valrie Chambers, associate professor and interim chair of the M.E. Rinker Sr. Institute for Tax and Accountancy at Stetson University.
“The Credit Card Accountability Responsibility and Disclosure Act of 2009 made it illegal for a credit card company to sign up an individual under the age of 21 without an adult co-signer, unless that underage individual shows convincing evidence of ability to pay.”
Chambers supports the idea that parents should co-sign if they decide the student should have a credit card.
“In this way, parents can monitor and limit account balances, easing students into financial responsibility with credit – students differ in how fast they acclimate to this financial responsibility.”
JJ Kinahan, chief market strategist for TD Ameritrade, believes that this is a personal decision.
“When choosing between debit and credit cards, there are pros and cons to each.” He explains that a debit card can ensure your young adult doesn’t go overboard in spending. “However, credit card fans cite the many reward bonuses, like cash back and travel points,” he says.
In addition to being single mom of three, including a daughter who is returning to college this fall, Leslie H. Tayne of Tayne Law Group, P.C., is a financial/debt attorney and author. She believes that the decision to give a college kid a credit card should not be made lightly.
“If a college student is not over 18 and is not working while in school, I do not recommend that parents give their child a credit card,” Tayne says. “And since they will have to co-sign for students under the age of 21 who don’t have proof of employment, parents must be prepared to face the potential burden of paying any outstanding balances should their child default on payment in the future.”
Other factors to consider
While a credit card can provide convenience, Kinahan warns again accruing additional college debt.
“Parents should consider their own financial health and credit history, the financial habits of their college-aged child, and what the card will be used for.”
For example, he advises parents to weigh such factors as whether the student will have a part-time job to help pay the credit card bill, and also consider how much has already been taken out in student loan debt.
“A recent TD Ameritrade survey found this was one of the biggest regrets of recent college graduates, and 24% of recent college grads said if they could do it all over again, they’d spend less money and get into less debt in their college years.”
These students found out too late that debt can affect the ability to get married, purchase a home, choose the desired career, and save for retirement.
Chambers believes a credit card can be invaluable in an emergency situation, but warns that parents need to know how much responsibility their young adult can handle.
“One strategy is to take out a joint credit card with a very low credit limit (like $500), and increase that limit as the student demonstrates financial responsibility.”
Another consideration: determining the right type of credit card. Tayne advises parents to do their homework.
“For example, a credit card that has a low credit limit, no annual fees, and cash back rewards, is a great choice for college students – and some cards may even offer special incentives for good grades.”
Tayne says that expectations and responsibilities should be made crystal clear.
“Students should be given a spending limit, as well as established guidelines on what type of items are ok to charge.”
For example, if the student has a meal plan, Tayne says they shouldn’t be charging restaurant meals on the card.
“Parents should emphasize to their child that a credit card should not be a means to support his or her college social life.”
This is already a problem among student loan holders. A survey reveals that some college students were using student loan money for other purchases such as clothes, meals, cell phone payments, etc.
However, she does believe that a credit card can be a good teaching tool.
“Parents should take the time to coach and show their child how to read statements, how interest works and how having a credit card can build good credit if it is used responsibly, with payments regularly paid on time and balances paid off in full by the next billing period.”
Kinahan agrees that parents should be upfront about approved uses, and also who would be responsible for making payments.
“If a student is able to work a part-time job to pay for expenses, a credit card could have potential benefits, such as building credit and establishing a positive payment history.”
However, he warns against racking up additional debt unless absolutely necessary. Also, parents (and students) should pay attention to due dates, interest rates, etc. For example, a late payment can cause the interest rate to increase significantly, so students can’t afford to miss the monthly due date. In addition, when parents co-sign, those missed and late payments will also affect their credit.
That’s why Chambers believes that “teaching” financial literacy must be based on what the parent can afford to lose. For example, can you afford to have your credit score dinged if the student misses payments? If the student maxes out the card – and even charges over the limit, can you afford to assume payments and handle the financial mess?
After this has been established, Chambers suggests setting ground rules.
“For example, charge your tuition and books, but nothing else – or, charge up to $250/month in lieu of a spending allowance.”
Depending on the student’s performance, she says parents can determine if they want to increase the spending limit or relax the rules.
In lieu of credit cards, Tayne says parents can give their students pre-paid credit cards or a debit card that is linked to a checking account.
“These are both great options because parents can have more control, set spending limits easily, or add money to the accounts as needed,” Tayne says. “Both pre-paid credit cards and debit cards are just as convenient as a traditional credit card, yet relieve the stress and worry over risk of making missed payments that can lead to late fees, incurring interest fees and racking up debt.”