Charging Ahead

By Ginny Frizzi

December 14, 2011 6 min read

Until a few years ago, it was easy for college students to apply for credit cards. Credit card companies set up tables around campus where students could sign up for credit cards while also receiving freebies ranging from T-shirts to pizza.

The results often proved disastrous, with students applying for and receiving credit cards and then running them up to the limit. Unable to make the monthly payments, they ended up with a poor credit score that followed them into the future.

Many colleges stopped allowing credit card companies on campus, but there was wider concern that more protection for students was needed. The Credit Card Accountability, Responsibility and Disclosure Act of 2009 requires banks to provide a reason for participating on colleges campuses and events. It also prohibits them from giving gifts or promotional items to entice students to take on debt by applying for credit cards.

The Credit CARD Act has made it more difficult for college students younger than 21 to get a credit card. Underage students are required to have a co-signer for the account or to demonstrate an acceptable level of income.

While most college students don't need a credit card, they want one and can potentially benefit from owning one, according to Andrew Schrage of Money Crashers, a personal finance website.

"I think there is one key lesson to teach a college student: If you don't have the money to pay for a purchase in full by the time the bill comes in, then you just can't afford the item.

"College students should use a credit card as though it were cash currently in their pocket and not a cash advance," he says.

The most common option is for parents to serve as co-signers. It is a strategy that Mitchell Weiss, an adjunct faculty member in the University of Hartford's Barney School of Business and author of "Life Happens: A Practical Guide to Personal Finance from College to Career," recommends against.

"As a parent with two grown kids, a finance background and more than 30 years in the financial services industry, I have never nor would I ever co-sign a credit application for anything other than a first apartment lease," he says.

Weiss has two reasons for this. The first is that if the student fails to honor his or her credit card obligations, it means the co-signer -- the parent -- is on the hook for the bill and his credit record is negatively affected.

His second reason is that there are several alternatives to co-signing, including arranging for a separate card for the student under the parent's credit card account, a method Weiss used with his son.

"I had the credit card company issue him a separate card under my existing account," Weiss says. "I made sure the ground rules were clear -- that the card was to be used for certain types of purchases and for a maximum value each month. Otherwise, the money would come out of his savings account.

"If I had to do it again, I'd still issue a separate card under my existing account, as long as that card could be isolated. A unique account number would do the trick. I'd also want to be able to limit expenditures for that card."

Secured credit cards, which are guaranteed by a cash security deposit that equals the card's limit, are another option that can help a person establish a credit history.

Even with secured cards, though, there are negatives.

"It's important to understand that the security deposit is being used to pay the monthly bill," Weiss says. "The cardholder would have to place new money on deposit every month to cover. It is the consumer's responsibility to pay the monthly charges so that the security deposit isn't being used to pay the monthly bill."

Debit cards are another option; the cardholder can purchase only up to the amount available from a linked checking or savings account. If the card owner has opted out of his or her bank's overdraft protection, however, overdraft charges could be triggered. Another debit downside is that unlike credit card customers, debit cardholders have no chargeback rights, Weiss says. A chargeback is a recourse to credit cardholders who dispute a charge on their account.

But whether it's debit or credit, Schrage advises students to think of life after college and prepare for it in all ways, especially financially.

"There is no doubt that your credit score will have an effect on your ability to gain access to any loans, whether it be for higher education, a mortgage, or living expenses. There is also a possibility it can affect your chances of obtaining gainful employment. If you have no credit history whatsoever, some prospective employers may wonder why.

"Ultimately, if your credit report show signs of responsible credit use and you get a head start at an early age, it can have long-lasting positive effects on your financial future," Schrage says.





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