Many young adults will be entering college next month and need to consider the responsibilities of adulthood, as well as the challenges facing them, both fiscally and academically.
One of the first considerations, when a student embarks on a college education, is whether or not to get a credit card. It is important to understand the benefits and pitfalls of credit card use.
Due to the restrictions of the Credit Card Accountability Responsibility and Disclosure Act, or CARD Act, the requirements for application have changed and students younger than 21 have to demonstrate they have the ability to repay their credit card debt. Failing that, they will need to have a co-signer before credit will be granted.
The CARD Act also will prohibit aggressive marketing to college students by credit card companies. Previously, students were lured into signing up for credit cards with free T-shirts, gift cards or chances to win iPods and other attractive electronic gadgets. Some states have already passed laws restricting such marketing on campus.
Why do credit card companies continue to take the risk of providing credit cards to students? There are three reasons:
1. Credit card companies know the likelihood is that the first card students get is the card they will keep.
2. If the student defaults, many times parents will cover the debt.
3. College graduates are more likely to earn more and thus become better customers after graduation.
We live in a credit-dominated society where most major purchases are bought with credit cards. The clever college student will make sure that upon graduation, he or she will have built an excellent credit record and come away with a high credit score. This will make possible purchases of homes and automobiles with favorable interest rates, and, in addition, will impress potential employers as to the reliability of the prospective job candidate.
What are some good ways to accomplish a favorable credit history for a student?
• Become an authorized user on the parents’ card. This form of piggybacking allows student charges to the parents’ card without the legal responsibility for repayment, since the card remains in the parents’ names. The activity on the card is reported in both the parents’ and the student’s names, thus building an excellent credit file for the student. This option also allows parents to monitor the student’s charges and cut off the credit, if the spending gets out of hand.
• Get a secured credit card. This type of card requires advanced payment as collateral for the credit and limits the amount of spending that can be done. Students need to be careful the secured card does not charge high fees for this service. Most will charge an annual fee and the interest rate may be higher than on a conventional card. Make sure that the creditor reports to the credit bureaus. It is important to pay responsibly, preferably paying the balance monthly. The advantage of this type of card is that it prevents over-spending while building a credit history. Generally a secured card can be converted to unsecured credit after a period of responsible use.
• If possible, obtain a card in the student’s name. This choice may prove valuable in quickly establishing a good credit record for a student. Most of these credit cards will carry a lower credit line, which may help to keep the damage to a minimum.
• Once credit is established, it is important to protect the student’s identity. Students should shred papers that contain personal information and never throw papers with such information in the trash. While using credit cards, students should obtain their free credit reports annually at www.annualcreditreport.com to check for any irregularities. There are three major credit reporting bureaus: Experian, Equifax and TransUnion. It is recommended one bureau report be requested every four months to track any progress and ensure no false information appears on the report.
Besides lenders, many employers and landlords review credit reports. Students need to strive to graduate with excellent credit files along with their diplomas and to be sure that their credit reports contain no erroneous information. The eventual benefit of the combination of a good credit history and a high credit score cannot be overstated.
This may be an optimal time to have the student attend a free credit counseling session conducted by a nonprofit agency, such as Consumer Credit Counseling Service of McHenry County. Books on the subject also are available at the library or local bookstore. Excellent online courses, such as Money in Motion, can be purchased through CCCS at minimal cost.
Next month I will address the growing threat of increasing student loan debt.
• Virginia Peschke is executive director of Consumer Credit Counseling Service of McHenry County in Woodstock.