College Kids and Credit Cards

Credit and debit cards can be great money management tools. They can also help young consumers build a credit history that will follow them in the years ahead. However, parents may need to help prevent extravagant spending by college-aged children who lack money management skills.

 

The question becomes one of preparedness and convenience. Your kids may need a card to pay for the unexpected contingencies of daily life while at college. They will need a way to purchase books and other learning tools. But how can you help prevent them from abusing credit and debit cards?

 

The Credit Card Act

In 2010, the Federal Reserve issued new rules for credit card issuers that make it much more difficult for young consumers to obtain and abuse credit cards. Credit card companies no longer set up booths during Freshman Week to encourage college students to open credit card accounts by offering T-shirts and other giveaways.

 

However, consumers under the age of 21 can still obtain credit cards if they have a co-signer to guarantee payment of charges, or if they can prove they have the income to make monthly payments without digging a deep hole of debt.

 

Credit Cards and College Kids

Being a co-signer may enable parents to track credit card charges made by their college-aged kids, but it doesn’t prevent credit card abuse. In fact, parents may find their own credit ratings negatively impacted by the buying habits of their kids.

 

So, what can parents do to: (1) teach respect for credit card use and (2) control spending by their kids before they make inappropriate charges to a credit or debit card? Fortunately, there are options.

 

First, teach your children money management basics. For inexperienced consumers, a credit card may feel like “free money.” Of course, it isn’t. And, it’s the job of parents to teach money management skills to their children – the skills they’ll use today and as they gradually build a strong credit history in the years ahead.

 

Children typically learn to handle money from parents. If parents are deep in debt, kids may see that as “normal.”  So keep your own spending habits under control, and keep your own credit and debit card spending under control. Teach by example.

 

Next, set down the rules for credit card use. Provide your college-aged children with the “house rules” for credit card use.  Credit cards should be used for emergencies, like a car repair. They should also be used for routine college expenses like fees, books, learning tools and other expenses that are part of modern college life.  Credit and debit cards should not be used to treat the entire dorm to pizza, or to take a trip during spring break. Make sure your kids understand and follow the rules you establish.

 

Have the credit card bill sent to your home address. There’s no better way to track your kids’ spending than a monthly credit card statement showing a complete list of charges.  This may prevent late fees and late monthly payments, which can harm credit ratings. One late payment can put a black mark on your long-established, unblemished credit history – something to avoid at all costs.

 

If you authorize your child to use your credit card, the monthly statement will automatically be sent to the address you have on record with the issuer. That’s a good thing. However, if your credit card has a high credit limit, your college-aged child has access to a lot of credit without a lot of experience in managing personal finances.

 

One alternative is to obtain a secured credit card for your college kids through your local bank. A secured credit card is backed by deposits in a dedicated savings account. Money is deposited in advance and held in that account, and the amount a child can charge is limited to the balance in the savings account.

 

If you provide a secured credit card to your freshman heading off to school, you’ll be limiting the amount that child can spend to the set balance in the dedicated account. Make sure you provide enough security to enable your child to handle unexpected emergencies and expenses, but not so much that you find yourself deeper in debt than your comfort level allows.

 

Discuss the credit limit with your child, explain how to use the secured credit card and, again, establish acceptable charges and “off-limits” use of a secured credit card.

 

Reloadable debit cards offer another alternative to parents. Sometimes referred to as general purpose reloadable cards - or GPR cards - reloadable debit cards can be used like any other card to make purchases online or at brick-and-mortar locations. The difference is that the money your child spends is not drawing on a checking/savings account or credit provided from a lender. It comes from money that has been added to the card. You can load the card with funds from a checking account or add cash to the card at a bank branch. You can add money to your card over and over, making it an everyday payment tool. Apps associated with the card even provide parental controls like “lock and unlock” and alert services.

 

Nevada State Bank recently introduced a GPR card called OnCard. In addition to the card itself, OnCard® offers a mobile app and a website that acts as a command center for all card-related activity.*

 

Use other payment methods to track student spending daily. Online payment gateways like PayPal^® enable students to use credit cards to make payments for legitimate expenses. These payment gateways also enable you to check to see what your son or daughter is charging. These online payment gateways may be useful in preventing further unacceptable charges, while making sure your child has the money to repair her car or purchase learning tools from the college bookstore.

 

There are lots of options from which to choose – options that can protect your child from expensive contingencies while limiting spending on inappropriate purchases.

 

Visit your local Nevada State Bank branch to develop a plan to help protect your child, your bank book and your credit score.  Then you can rest easy, knowing your child is prepared for emergency expenses while your own credit and cash flow remain sound.

 

*For more information on using prepaid debit cards like OnCard, see this related Two Cents article,

 

The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A. Member FDIC