If your child is heading off to college, you might be thinking he or she needs a credit card -- you know, for emergencies. My parents gave me one my freshman year of college, and my desire to have some new clothes seemed like enough of an emergency to justify using the card. And the cafeteria food was so bad that a few pizza purchases with the card seemed justifiable, too.
The truth is credit cards and teens don't always mix well -- especially if kids haven't been taught to use credit wisely (I wasn't given that lesson before going to college). Even if you talk to your child about credit, he still might not have the maturity to make wise choices.
Luckily, a new law makes it tougher for teens to get a credit card on their own. The law requires anyone younger than 21 who wants to open a credit-card account to have proof of income or get an adult co-signer. So most kids will have to ask mom or dad to sign for a card. Before you say yes, consider these pros and cons:
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PRO: As a co-signer, you get a monthly statement, too. So you can monitor your child's spending.
PRO: The card's credit limit can't be increased without your approval.
PRO: If your child is responsible, he can build a good credit score while in college.
CON: If your child makes a late payment, it will show up on your credit report.
CON: If your child doesn't pay off his debt, you (the co-signer) will be responsible for it.
CON: If you pay the bills for your child, he won't learn how to manage credit.
If you think the cons outweigh the pros, start your child with a debit card so he or she can learn to balance a checking account before getting a credit card (see Debit Versus Credit Cards for Kids). However, if you're willing to co-sign for a credit card for your college student, you need to teach him or her how to use the card responsibly. Follow these tips from Bill Hardekopf, chief executive of LowCards.com and author of The Credit Card Guidebook:
1. Make it clear that credit cards are loans that have to be repaid in full each month.Tell them what is a good time to use a credit card for payment (textbooks, emergencies) and what isn't (clothing, food, entertainment).
2. Use your credit card bill to explain interest rates, grace periods and minimum payment.
3. Show them how much they will pay in interest by only making the minimum payments. Our tool can help.
4.Tell them about the fees and penalty rates. Help them sign up for online payment with reminders to help avoid late payment fees.
5. Teach them that credit scores will be nearly as important as test scores (see Why Your Credit Score Matters). Show them how they can get a free copy of their credit report from each of the three credit bureaus (Experian, Equifax and TransUnion) once every 12 months at www.annualcreditreport.com.
6. Give advice on how to avoid credit card theft and what to do if your card or identity is stolen (see How to Protect Yourself Against Credit-Card Theft).
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