August 24, 2012
The hunt for the extra-long sheets for the dormitory bed might be complete, and the car is probably packed to the roof for the trip to college, but before dropping your child off on campus make sure you don't forget to talk about money, and especially credit cards.
Students typically are naive about high interest rates, penalties from missing payments and the lousy credit scores that will hound them for years if they don't give their credit cards proper attention in college. Many adults, who are in trouble with debt today, started burying themselves with credit cards while in college.
In the past, banks spent college welcome weeks in booths peddling cards with killer interest rates to students with no income. Now, new federal rules keep them off campus and prevent them from giving credit cards to students without jobs or assets. But the cards find their way to college students anyway, and interest rates and penalties can still be unmerciful. So some preparation is in order.
Now banks find college students through their Facebook profiles and entice students through games and prizes, said Odysseas Papadimitriou, chief executive of CardHub.com, a site that compares credit cards.
About 35 percent of college students have credit cards, and three-quarters of those have them in their own name, according to a recent survey by lender Sallie Mae. Only a third pay their cards off each month; 42 percent carry balances of $500. Three percent carry $4,000.
Parents who want to keep tabs on their children in college may get a credit card for their offspring in both of their names. The interest rates on cards aimed at students average 16.3 percent, said Papadimitriou, providing this comparison: cardhub.com/best-credit-cards-for-college-students. Parents must guarantee payments so if a student fails to pay the balance each month, the parent must. If payments are missed, the parent's credit score will take a hit.
Yet, rather than parents overseeing student credit cards, Papadimitriou thinks parents should steer students to “secured cards” so the student learns to stay within a budget and be responsible, making timely monthly payments. With a secured card, the student can only charge as much as the sum of money that's deposited in advance. So, for example, if a student deposits $200 it remains security for the bank, and the student can charge up to $200. She then makes regular monthly payments to pay off any purchases she's made up to $200. Think of the $200 like a security deposit for an apartment. If the student makes card payments in a timely manner, and eventually closes the secured card, that's when the deposit will be returned.
Papadimitriou likes secured cards such as the Capital One Secured card because students who pay reliably build a credit history — a necessity after college in order to get credit cards, rent apartments or borrow for purchases like cars. He urges parents to have their children make the security deposit so they have money to lose if they are sloppy with their payments.
The drawback, however, is that there are fees for secured cards, and they can also be a hassle. If a student needs to buy a $300 airplane ticket home, but only has deposited $200 as security, she won't be able to buy the ticket until she deposits another $100.
I prefer the simplicity of a debit card instead. As long as there is no overdraft protection on it, the student won't be able to spend any more than she has in her checking account.
Ideally, before leaving your child at college, you will teach her to watch her balance in her checking account daily to make sure there is enough to cover debit card purchases. And you will have her create a budget for all her expenses.
For a detailed calculator that will walk you through a year, try bit.ly/Soo8bH. For a simple monthly budget, try bit.ly/aSUzlJ.
Papadimitriou notes that debit cards lack protection if stolen, and your child won't be building a credit history with a debit card. But students can also build credit histories by making student loan payments on time.
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