Bruce Ailion, a realtor and attorney with RE/MAX Town and Country in Marietta, Ga., introduced each of his five children to credit cards in their early teens. From about age 14 onward, he let them charge things on one of his cards. When they turned 18 and started college, they got their own credit cards. Ailion explains that he wanted to ensure his kids established positive credit histories.
“Credit impacts every aspect of people’s lives today,” he says. “It determines the interest rate you will pay when you finance a car, buy a house and can significantly impact the total cost of each. It is used in evaluation of employment; certain jobs in financial firms are not available to those with bad credit. It impacts the cost and availability of insurance. If you plan to start a business and need loans to grow that business, good credit is a necessity.”
Student credit cards can offer a great opportunity for young adults to build a credit history and their credit scores. It will have a positive impact if they are responsible enough to manage the spending and repayment of debts. If you are a college student looking to get your first credit card, or a parent considering getting your child his or her first card, here is what you need to know about the basics of student cards.
How student credit cards work
In 2009, it got more difficult for college students to obtain credit cards. Congress passed the Credit Card Accountability, Responsibility and Disclosure Act of 2009, which includes provisions meant to protect college-aged consumers, according to the Consumer Financial Protection Bureau’s 2014 report to Congress on college student credit card agreements.
For instance, card issuers are not allowed to market prescreened offers to people younger than 21 without consumer consent. They also cannot offer credit to anyone under 21 unless the applicant can prove he or she is able to make payments or gets a cosigner older than 21 (for example, a parent). Students without cosigners will have to demonstrate that they are employed or otherwise have the ability to make payments. Qualifying for a student credit card also generally requires proof of enrollment at a university, college or trade school.
Students younger than 21 who want to build their credit scores but do not have cosigners or cannot demonstrate the ability to make payments independently might be able to find an alternative in the form of a secured credit card – which is usually connected to a savings account, a percentage of which is the credit limit – from a bank or credit union, according to Experian, one of the three credit bureaus. If the student demonstrates responsibility with the secured card, he or she will likely be able to eventually transition to a regular credit card.
Some credit card issuers offer student credit cards as rewards cards that incentivize timely payments and good grades. The credit limits for student credit cards – typically around $500 – are usually lower than the limits for regular credit cards.
Even if a parent acts as a cosigner, the student will usually get the bill for the card and initially shoulder responsibility for any accumulated debt. However, if a parent cosigns for the card, he or she can be held responsible for any unpaid debts.
Reasons to get a student credit card
Students who manage their money well and begin to establish a positive credit history can reap significant benefits in the future, says David Bakke, a writer and contributor for the financial information website MoneyCrashers.com.
“A good credit score will get you lower interest rates on future credit cards, a home loan, and you’ll pay less in auto insurance premiums as well,” he says. “It can even affect your ability to find work.”
However, he cautions that students should not get credit cards if they do not yet have the ability to make sound fiscal decisions, and that all students with cards should avoid carrying a balance. Just like a positive credit history from their college years can help them get loans and jobs, a track record of poor spending decisions and debt can lead to bad credit scores and subsequent financial difficulties. Additionally, parents who cosign can see their own scores take a hit if the student makes payments late or carries a large balance.
Bakke says parents can help prevent that sort of situation by educating their children about responsible credit card use, such as making payments on time and not carrying a balance from month to month.
Ultimately, Ailion states, it is crucial for parents to aid their children in building their credit scores and creating positive credit histories.
“Assisting your children in starting, growing and understanding how to maintain good credit is as important as making sure they get on the bus the first day of kindergarten,” he says.