Despite a law passed in 2009 meant to curb rampant credit card hawking on college campuses, more than 70 percent of American college students currently have credit cards. Of these students, 90 percent carry credit card debt, which averages more than $4,000. How can you help your student meet his or her financial obligations, and stay safe on campus, without sinking into the credit card trap? Consider the following tips:
Don’t Rule Out a Personal Loan
If your student won’t be able to make ends meet on his or her savings and income, some consumer debt may be necessary for basic living expenses. The problem with trying to use credit cards as solutions is that they are revolving lines of credit. If your student makes a payment, he or she now has more credit “freed up” and it can be tempting to go out and buy new clothes or video games. Also, credit card companies are notorious for automatically raising credit limits. To students, this can seem like free money. Pretty soon, your student’s debt level starts moving in the wrong direction, even as payments are being made.
You may be able to avoid this trap by authorizing a non-revolving personal loan. Calculate exactly how much your student will need to keep in line with his or her budget, then have the loan written without any room for unaffordable extras. While your student will need to make monthly payments, he or she won’t be able to put additional expenses back onto the loan. Our Promissory Note document can be used if your child will be securing a loan from “The Bank of Mom and Dad,” or another private party.
All Cards are Not Created Equal
One of the perks of credit cards is that they can be carried anywhere and used quickly. For students living on their own for the first time, this is an important safety measure. Several years ago, an emergency credit card was a common item for parents to send to the dorms with incoming freshmen. Today, however, there are other options that give students the ease of use and security of a card, without the risk of uncontrollable debt:
- Debit cards: Debit cards look similar to credit cards, but they draw funds out of linked checking or savings accounts, instead of the bank’s good graces. You may opt to put some of your student’s savings, or personal loan monies, into an account, with an agreement that it will stay there unless there is an emergency, in which case the student can access it using his or her debit card. Your student can get in trouble if debit cards are abused, since some banks allow transactions to go through even when there are not enough funds in the account to cover them. Overdraft fees are often issued in these instances, which can be as high as $35 per transaction. If this is a concern, request that your bank decline transactions if the funds are not available.
- Prepaid credit cards: Most major credit card companies, including Visa, Mastercard, and American Express offer reload-able prepaid credit cards, sometimes known as prepaid gift cards. These cards are processed by merchants in the same manner as standard credit cards. They are similar to debit cards in that they draw from actual money instead of an unsecured line of credit. Instead of being linked to a bank account, however, they are “loaded” with a set amount of funds that is transferred from a bank account or mailed to the credit card company by check. Since it is not possible to overdraw prepaid cards, it should be simple to explain to students that the card is only for emergencies, and that it will be declined once the pre-determined figure has been spent.
Build Credit Responsibly
One of the reasons some parents overlook credit card debt is that credit cards help establish credit histories for their students. While this is true, favorable marks on credit reports can quickly become blemishes once debt becomes unmanageable. You can help your student build a positive credit history without subjecting him or her to the risk of credit card debt. Start by putting his or her name on any non-revolving loans needed for college, including personal loans and car loans. Even if you will be making payments, or you prefer to manage account information, you can still take control over the loans as a co-signer. Ask your personal bank representative for more details.
There’s plenty to stress about when you send your kids off into the world. If you teach them to avoid the credit card trap, you can cross one big worry off your list.
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