$tarrBuck Report, September 3, 2006: Credit Cards for College-Age Kids

September 3, 2006

$tarrBuck Report, September 3, 2006: Credit Cards for College-Age Kids

by K. Antonovics

Stacey and her mother Marcia are talking on the phone. Stacey’s younger brother Junior is going off as a freshman to Ann Arbor.

Stacey: Hi Mom! Is Junior all packed and ready to go?

Marcia: Well, we’ve had a heart to heart laundromat instruction session. He understands the wash cycle — I don’t think he gets separating the whites from the colors. He’s ready. It’s going to be awfully quiet here without him.

Stacey: Have you thought about getting Junior a credit card that he can use in Ann Arbor?

Marcia: Don’t be ridiculous! Junior doesn’t need a credit card! We’re already paying for his room and board!

Stacey: But what about emergencies?

Marcia: He can phone home.

Stacey: I think he’ll need a credit card. Besides, that’s how he can get a credit history. They keep track of those things. When I was at Michigan, I didn’t have a credit card and my credit rating was lousy when I got out, because there was no history. I had to pay an extra $60 a month in car payments just because they wouldn’t give me a good interest rate.

Should you give your kid a credit card for college?
Well, the first thing to recognize is that you may not have any choice over whether your college-age kid gets a credit card. Credit card companies aggressively market to college students, and in most states, students over 18 do not need their parents to cosign in order to get a credit card. In a 2005 study of the credit card use among college students,
Nellie Mae, the student loan corporation, found that, by their senior year, 91 percent of all college students have one or more credit cards. Further, according to a report completed by The Education Resources Institute and The Institute for Higher Education Policy, only about 17 percent of college students obtained their first credit card from their parents. So, your college-bound son or daughter is very likely to end up with a credit card whether you give it to them or not. Since credit card use is a reality among college students, the best thing for you to do is to talk to your kid about the benefits and dangers of having a credit card.

Plastic paradise
There are lots of good reasons to have a credit card in college. For one thing, a credit card can be useful in an emergency. In addition, at some point in his or her adult life, your kid will need to establish a good credit history in order get car loans, mortgages and other forms of credit, and a great way to build a good credit history is to get a credit
card (at least, provided your kid makes the monthly payments on time). Further, it may be hard for your kid to get a credit card after college if he or she didn’t get one in college. This doesn’t mean it’s impossible for someone to get their first credit card after college, but it may take more work. For example, your kid may need to apply for a gas card or a department store card (which are easier to get than standard credit cards) in order to build a credit history. Alternatively, as their parent, you could co-sign on a credit card for your kid.

Plastic pandemonium:
Of course, credit cards are dangerous things, and many college kids (like many adults) get into serious trouble with credit card debt. According to Nellie Mae, in 2004 the average outstanding balance on undergraduate credit cards was $2,169, and more than half of all college students had outstanding balances over $1000. While this may not necessarily seem like a lot of money, college students generally have very little income, and many college students don’t understand the costs of carrying a balance forward. Nellie Mae says that only 21 percent of college students pay their monthly balance in full, and 23 percent of college students report making the minimum payment or less. Carrying forward these balances can be extremely costly. Suppose, for example, that your kid has a credit card balance of $1,000 on a credit card with an annual interest rate of 17 percent. If they only make the minimum monthly payment of $25, it will take 5 years to pay off the balance, and over that time, they will have paid about $486 in interest, so the total payment ends up being $1,486. Explaining these facts to your kids may make them less likely to charge more on their credit cards than they can afford. It’s also important to explain to them that even after they graduate and have a job, their disposable income may be less than they expect. By the time they factor in taxes, rent, student loans, gas and food, there may be little leftover to pay off credit card debt incurred in college.

And, of course, if one of the primary reasons for getting a credit card is to establish a good credit history, then unmanageable credit card debt is the last thing your college-age kid needs, and a bad credit history can make it difficult for your kid to do everything from getting a car loan to renting an apartment.

What to look for in a credit card:
When talking to your kid about credit cards, remind them to look for a credit card with:
* No annual fee
* A low interest rate
* A low spending limit

In addition, explain to them that they are less likely to get into trouble with debt if they have only one credit card. Nonetheless, Nellie Mae estimates that a whopping 56 percent of college seniors have four or more credit cards.

The bottom line:
Getting a credit card in college can be a good thing, especially for building a credit history. Many college students, however, don’t understand the perils of credit card debt. Talk to your kids about what to look for in a credit card and the costs associated with not paying the full balance every month.

Stacey and Marcia are wrapping up the phone call:

Marcia: OK. We’ll give it a try. He’ll get a credit card. But from what I’ve seen, Junior isn’t exactly good at saving money ­– with a credit card he may end up ruining his credit history!!

Stacey: Yeah. You’re right. Credit’s probably a chance he’ll have to take. I’m afraid it’s going to be like his sex life. We can’t control it. We’ll try to remind him to keep it happy and safe.

Marcia: OW!!! Did you have to say that?? Oh, it’s going to be a really long semester!!

(c) Copyright K. Antonovics 2006

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One Response to “$tarrBuck Report, September 3, 2006: Credit Cards for College-Age Kids”

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