Before sending their kids off to college, many parents sit them down and talk about the big issues: drugs, alcohol, sex.
But what about credit cards? Getting off on the wrong foot when it comes to credit can have a huge impact on your adult life. A bad credit score can hinder your ability to get your own apartment or even a job after graduation - goals that are no doubt on every college student's list. High levels of credit card debt are stressful, and an extra burden no student needs when faced with exams, papers and the pressure to fit in.
A Sallie Mae study released this year found that the average undergraduate carried $3,173 in credit card debt in 2008, the highest level since the company began collecting data in 1998.
This year, however, things are a little different. The Credit Card Accountability Responsibility and Disclosure Act of 2009, also known as the CARD Act, was signed into law by President Barack Obama in May. It helps protect consumers of all ages, but has a special section dedicated to young adults. Starting in February, anyone younger than 21 applying for a credit card must either show proof of income or ability to repay debt, or have an adult co-signer. That means that credit card companies have little incentive to spend time on college campuses soliciting new customers.
But what about this fall semester?
"Will we see compliance in advance, or will they try to squeeze every last penny out of the student borrowing population? Universities might be tougher in terms of what they allow to occur, but we also have to remember that college campuses are generally part of a town, so the minute a student's toe touches on nonuniversity property, they could be greeted by a credit card company," says Adam Levin, co-founder and chairman of credit.com.
That means students still need to be prepared, and as a parent, the ball is in your court. Here's how to approach the situation:
Talk it out. Don't use the CARD Act as an excuse to avoid the situation. Sit down and explain how credit cards work, from interest rates to credit limits to the importance of reading the fine print. "I really encourage young adults to learn to read the disclosures in everything, not just credit cards," says Michael Wagner, author of Your Money, Day One: How to Start Right and End Rich.
Consider a pre-emptive strike. Consider getting your student a credit card now, before the new law takes effect. It will prevent you from having to co-sign, meaning any mistakes made by your student won't darken your credit history. I am a firm believer that college students should have a credit card. If used wisely, it's a tool that helps them establish a credit history, not to mention they'll be prepared in case of an emergency. But only you know whether your child is responsible enough to handle a credit card, or if you need to lend a hand. If you have doubts, start small by adding him as an authorized user on your own card, Levin says.
Set limits. If you want to provide your student with spending money while they're away at school, that's fine, whether you do it by adding them as an authorized user and paying the bill off each month or giving them good old-fashioned cash. But set a limit on how much they can spend each month, and if the pot runs dry, don't bail them out. Sending more funds when the initial budget is exhausted sends the signal that you're their financial cushion, no matter how much they spend or what they spend it on.