Not so many years ago, college students were inundated with credit card applications. The common pitch to students: get a credit card at a low introductory rate and pay your bills while establishing your credit.
Card companies knew full well that many students lacked the understanding or maturity to properly handle a credit card — and in many cases, both. Predictably, some college students ended up with unmanageable credit card debt on top of their student loan debt.
Since the reforms established in the Credit Card Act of 2009, it is far more difficult for students to get their own credit cards. Anyone under the age of 21 who wants a credit card now has to prove that they can make payments with their independent income source, or must find a co-signer over the age of 21. The co-signer has control over the credit limit on the card.
While these restrictions were necessary, they do limit the options for responsible teens who want to establish their credit history early. As a parent, you can simply co-sign your child's card, but you also have a few other options to help your kids establish credit.
- Authorized User – You can generally add your child as an authorized user to your account, and in some cases, you can establish a lower credit limit for a secondary user. This allows you to monitor spending to the extent necessary and adjust the limit as your child shows increased responsibility.
Meanwhile, your child has an opportunity to build his or her credit while getting an initial credit score boost from you (known as "piggybacking"). Of course, this assumes that you have good credit.
The downside is that any poor spending and repayment habits from your child can stick you with unwanted bills and hurt your credit. Check the card policies to make sure you understand the ramifications if your child overspends or fails to pay.
- Secured Cards – Secured cards require a deposit with the card company, typically at or near the credit limit. Aside from that, a secured card works in the same way as a regular credit card — but fees are generally higher and balance limits are lower. Your child will still need to show the means to make repayments (with less stringent requirements compared to a regular card).
Rates and terms will vary significantly for secured credit cards, so shop around to find the best option for your situation. Try to find a card that can be converted over time into an unsecured card with proven responsible behavior.
Another alternative is to go with a debit card, where your child can't spend beyond the amount in the connected bank account. A debit card won’t directly build up your child's credit history, but using a debit card to pay regular running bills on time will help his or her credit score by showing regular payment patterns. The debit card use can also serve as a trial period to prove that your student is spending his or her money responsibly.
Pre-paid cards are similar to debit cards in that they are backed by committed funds (thus they aren’t true credit cards). They also do not build your child's credit score directly, but they can be used in ways that show responsible spending. The advantage of these cards is that most have a means for parents to monitor the spending (as compared to a separate debit card in your child's name).
Pre-paid cards have typical limits on the amount that can be loaded or withdrawn from ATMs in a given period of time, and you will incur fees every time the card is reloaded. Unless you have concerns about your child's spending habits, a debit card is generally economically preferable to a pre-paid card.
With any of these methods, your child can build a credit history with good habits — or destroy it with poor habits. Regardless of the path you choose, educating your kids on the proper use of credit is important. Don’t forget that important task, or both you and your child will suffer as a result. Even in college, beer and pizza aren’t free.
If you want more credit, check out MoneyTips' list of credit card offers.