Tips for Parents
It didn't always used to be this way. A generation ago, few college students had their own credit card. Yet, in 1998, 67% of students came to school with a card. And now at least 75% of college students have that piece of plastic in their pockets.
While many students contend with credit responsibly, it is also a mighty temptation for others, some who rack up serious debt. Top that off with appealing credit card offers in the student union accompanied by free T-shirts or iPod raffles, or Internet offers that seem too good to pass up, and you have a problem.
Watch Out for These Concerns
As a concerned parent, you can help your student steer clear of debilitating credit issues by increasing your own awareness. Here are a few of the lesser-known issues involved with student credit cards:
Universal Default. Some companies alter cardholders' rates when their credit scores change. So, if a student misses a payment or two, his credit score can go down significantly. Then, if he has two credit cards, paying one faithfully but missing a payment on the other, universal default kicks in, raising the interest rate on both cards to 30%!
Too-High Credit Lines. When a college student can access a $10,000 line of credit, something is wrong. And the potential for problems of living beyond her means is high.
A Lack of Information. Students can have a difficult time understanding the terminology and the mathematics of credit.
A Culture of Debt. When students have immediate needs, such as gas, food or books, they can easily get in the habit of charging these purchases. This can become a cycle, as the debt increases, along with late payments, leading to more charges just to make ends meet.
How Parents Can Help
Now, how can you help your student?
- Share the Dangers of Paying on a Card and Collecting From Friends. It's a common practice among students: one will put the whole dinner or movie charge on his credit card and friends will reimburse him with cash. This money, intended to pay the bill, can easily disappear, however, leaving your student with a large credit charge and no way to pay it.
- Explain the "Grace Period." A credit card statement may tout a 15-25 day "grace period" to pay your bill. However, this may only apply if students don't have a previous balance on their account. If they do have a balance, chances are that they'll be paying interest on their new purchases right away.
- Encourage Students to Pay Up. Paying off credit card balances avoids interest accumulation while helping students prove to creditors that they are a good credit risk. An active, paid up account will make it easier for students to negotiate with loan officers in the future.
- Talk About the Practice of "Living Off Your Credit Card." It may seem convenient for students to use their credit card for everything but the benefit of cash is that it's much easier to keep accurate tabs on spending. Credit card purchases often don't show up on a printed bill for a month and by then, students may have gotten themselves into trouble.
- Warn Them to Put the Charge Card Down and Step Away From the Mall! Recreational shopping is a pastime of choice for many students. Encourage them to know their limits so that peer pressure and impulse buying don't lead them to poor money decisions.
- Ease Into It. Encourage your student to start with a low credit limit to avoid temptation. Make the card for emergencies only. His future credit card usage will probably be more prudent as a result.
- Start the Practice of Paying on Time. Your student can avoid late fees by paying on time. Encourage her to pay her bill as soon as it arrives so that it's not lost in the shuffle of he busy life. Making mistakes in this arena can be hard to rectify.
- Don't Go Overboard. Just because someone offers your student a credit card with low introductory rates doesn't mean he has to apply for it. Too many cards can get confusing and students are bound to have a tough time keeping track of what they've actually spent.
In addition, parents can set up to receive duplicate statements or monitor their students' account online, if they want to help them stay on track with credit card care.
The "spend now, pay much later" temptation associated with credit cards is causing many students to get in over their heads. According to the Nellie Mae Corporation, 91% of students own at least one credit card by their senior year, with an average balance of $2,850. With your guidance, your student can make safer, smarter choices.
Sources: www.businessweek.com, 9/4/07 and 9/7/07; www.cbs.com, 9/12/07
Student Credit Card Protection Act
According to Business Week (9/4/07 and 9/7/07), the Senate is expected to hold hearings this fall to examine the credit card industry's practices. Representative Louise Slaughter (D-NY) re-introduced a bill, the Student Credit Card Protection Act, this August that would limit students' credit availability to 20% of their income if parents co-sign for the card or $500 without a co-signer. Plus, credit issuers would be required to review students' credit history and proof of income before handing out a credit card.
Prepared for our institution by PaperClip Communications, www.paper-clip.com.
Copyright 2006, 125 Paterson Ave., Little Falls, NJ 07424