Dear Opening Credits,
My daughter is a freshman in college, and she's getting credit card offers. She doesn't have any income. How can I help her make smart decisions about getting a card? -- Worried Mom
College can be a great time for students to establish credit histories, but it can also be a time to rack up devastating debt that will follow them into their adult lives.
Card issuers know students don't have much income, if any, but issuers make offers nonetheless. Dormitory mailboxes aren't overflowing with them as they were a few years ago, thanks to issuers tightening their lending standards in reaction to the economic crisis. Still, college students are a big source of revenue for credit card companies. In fact, a study by student loan provider Nellie Mae found that college freshmen carry an average balance of $1,585. That average balance swells to $2,864 by their senior year.
The free-spending mentality of new cardholders gets many students into trouble. And when the high interest rates found on some student cards kick in (not to mention the hefty annual fees), a student's quest for financial independence can quickly turn into a money nightmare.
Before your daughter signs on for a card, help her search for one with a low interest rate and no annual fee with our student credit card finder.
You can also support your daughter's endeavors by giving her some tips on smart credit card spending:
Understand the terms of the card. Know the interest rate, the fees and the payment schedule.
Beware of 0 percent teaser rates. While 0 percent interest is enticing, the offer may tempt her to spend more than she can afford to repay. When the introductory rate is over, the interest rate will swell and so will her balance. Know what the "go-to rate" is.
Play with interest rates. To show your daughter how debt can accrue thanks to interest, plug some hypothetical numbers into our credit card calculators for some examples. Those $50 shoes and last week's $15 pizza delivery at 20 percent interest can get really expensive.
Set a budget. If your daughter receives an allowance, she should learn not to charge more than she'll be able to pay. If she does, her credit card balance will balloon with interest charges.
Pay on time. Your daughter will start to build a good credit history if she pays on time, even if she can't pay the balance in full. That takes us to our next tip:
Pay in full. To avoid costly interest charges, she should try to pay her bill in full each month. If she can't, she should pay as much as possible.
Don't go over the limit. If she spends too much, she'll incur additional fees for spending more credit than she's been allotted.
Instead of a traditional credit card, another option to consider is a secured credit card. As cardholder, she'd deposit a certain amount of money in an account with the card issuer, and her credit limit would be the same amount. If she fails to make payments on the card, the issuer will already have the deposited funds as collateral.
You may also want to keep an eye out for pending federal legislation that would limit the total credit that can be given to college students. The bill would amend the Truth in Lending Act and require card issuers to get proof of income from college borrowers before offering a card. If passed, it would stop card issuers from extending credit to students who don't have income or a co-signer.
And before you co-sign a card with your child, remember that if she gets into trouble, you'll be on the hook for her debt and your credit report could be negatively affected.
Karin's money makeover column "Get With The Plan" can be seen every Sunday in "The Star-Ledger" and "The Trenton Times." She also hosts and writes "Money 911," a multimedia series for MSN Money. Before writing became her main focus, Mueller was the executive producer of CNBC's The Money Club, where she led the team that won the network's first ever Cable ACE Award for Business and Consumer Programming. Mueller lives in New Jersey with her husband, three kids, one guinea pig and one leopard gecko. Whatever they don't eat goes into her retirement savings accounts. A comprehensive archive of her writings is available on her Web site, www.KarinPriceMueller.com.
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