College Kids and Credit

Although the Credit Card Accountability Responsibility and Disclosure Act of 2009 prevents credit card companies and retailers from issuing credit cards to anyone under age 21 (unless they have a co-signer who is over 21), many college kids arrive on campus armed with credit cards “for emergencies.” Along with unused funds from their student loans, the lure of all this “free money” sends some kids on spending sprees, purchasing pricey electronics, new clothes, and more.

While their spending may stay under the parental radar for a while, unpaid debts are tallied by creditors and reported to credit bureaus. Years later, that good idea of taking out a credit card to build a credit history can backfire as graduates are hounded by debt collectors and (depending on the state) sued by credit issuers.

What’s a Parent to Do?

Before handing over the plastic or cosigning a loan, have a frank talk with your teen on the basics of budgeting, and agree on reasonable purchases (and limits). “Step in early, especially if they are living a lifestyle they can’t afford,” advises Laura Creamer, a financial education specialist for CredAbility who visits college campuses to speak to students about financial responsibility. “Define when they can use the card, what constitutes an ‘emergency,’ and when they can’t use the card,” she adds.

CredAbility offers a budget calculator [1] to use during a financial discussion teaching teens how to balance spending with income. There’s also a calculator at the site to show them how long it takes to pay off accrued credit debt and the extra fees that might be involved.

Your bank or credit union may have a financial advisor who works with students to be sure they understand the responsibilities of credit. And if you are involved in the terms being negotiated for a student credit card, ask for a low credit limit so if your student goes over, the card will be declined.

According to experts, the most important thing is to take immediate action before accumulated debt affects their ability to purchase a car, home or even land that dream job.