In 2008, Sallie Mae reported that 84% of all students had a credit card. The average balance on these cards skyrocketed from $2,169 in 2004 to $3,173 in 2008 according to Sallie Mae. With so many credit card companies parking there tables on college campuses trying to sign kids up for credit cards it caused recent legislation to be enacted in May that will change the credit card game.
The new provisions do not take effect until February, so if you are under 21 the card companies are still at your avail. However, I recommend that you steer clear of this until you talk to your parents. The new law will require students under 21 to prove they can afford payments. C’mon, isn’t that where we got in some of this mess before. Students, you may not want your parents to know about all of your spring break activities, but being an authorized user on their card will allow you to build some credit without being sucked in early to the pit of consumer debt.
In the meantime, be careful about offers for some cool free items just to sign up.
But next year, a familiar site on many campuses will disappear: the tables strategically placed in high-traffic areas, offering free iPods, T-shirts and other goodies to students who sign up for a credit card.
Legislation signed into law in May will prohibit credit card companies from offering gifts to college students who agree to fill out a credit card application. The legislation also prohibits lenders from issuing credit cards to individuals younger than 21 unless they can prove they can afford payments or get a parent or other older individual to co-sign.
Consumer advocates say these reforms are long overdue. However, the provisions don’t take effect until February. In the meantime, credit card companies can continue to market their cards, and some advocates worry that this year’s campaigns will be more aggressive than ever.
“We’re calling it the last open season on credit for college students,” says Gail Hillebrand, attorney at Consumers Union.
Having a credit card can help a student build a good credit history, making it easier to qualify for a car loan or other types of credit after graduation. But the reverse can happen if the student runs up charges he can’t afford to pay, Hillebrand says.
“Building credit is a good idea, but a credit mistake stays on your credit report for seven years, and those seven years can really hurt you,” she says.
So how can a college student build a credit history without getting into trouble? One alternative is to become an authorized user on a parent’s credit card, says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. A student who is an authorized user can use her parent’s credit card, and her use of the card is reported to the credit bureaus in her name.
Adding a child as an authorized user allows parents to keep track of the child’s credit card spending, Cunningham says. If the student isn’t abiding by the rules, the parent can remove him as an authorized user, she says. That gives parents a level of control they wouldn’t have if the child had the card in his own name, she says.
Keep in mind, though, that the card holder — not the authorized user — is legally responsible for the credit card debt. For that reason, Cunningham says, parents should establish clear guidelines before adding a child’s name to a card. Otherwise, their own credit score could suffer.
If a student has demonstrated that she can handle the responsibility, it’s appropriate for her to get a credit card in her own name, Cunningham says. Suggestions for selecting the right card:
•Forget about the free T-shirts. Don’t automatically sign up for a card that’s being marketed on campus, “because it’s probably not going to be the best deal out there,” says Ben Woolsey, director of marketing and research for CreditCards.com.
Ideally, you want a credit card with no annual fee and a low interest rate, Woolsey says. You can compare rates and fees at www.creditcards.com, www.bankrate.com or www.indexcreditcards.com.
•Forget about rewards cards, too. Who can resist free airline miles or cash back? Well, you should, if you don’t have much money and are trying to use your card responsibly. Rewards programs are designed to encourage card holders to use their cards frequently, which shouldn’t be your goal if you’re a student trying to build a credit history, Woolsey says.
•Don’t be misled by low teaser rates. Some credit card issuers offer a low introductory rate to induce customers to sign up. But if you’re carrying a balance and make a late payment — even by a day — the interest on the money you owe could double or even triple, Consumers Union says.
•Consider a secured credit card, but be aware of the drawbacks. Lenders that issue these cards require you to deposit an amount equal to your credit line. For example, if you want a card with a $500 credit, you would need to deposit $500. These cards are often used by individuals who are trying to build their credit.
The advantage to secured credit cards is that you can’t run wild, because you can never spend more than you have deposited. But some secured credit cards have high fees, Cunningham says.
Many credit unions offer secured credit cards with low interest rates and fees. You can also search for secured credit cards at www.bankrate.com.
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