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Law may force parents, children to talk about credit cards

Parents would have to co-sign for students' credit cards

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It's time for parents of college-age children to have that "big talk." But not about safe sex, drugs or even binge drinking. Law may force parents, children to talk about credit cards

The new credit card law that takes effect in February 2010 may force some parents to sit down and talk to their children about credit cards -- at least that's what consumer advocates and supporters of the portion of the law limiting credit cards for people under 21 hope will happen.

Among other things, the Credit CARD Act of 2009 requires young adults who want their own credit cards to show proof of income or ability to repay credit card debts. As an alternative, parents or other adults must co-sign for anyone under 21 to get credit cards in their own name. Thus, parents will be legally responsible for repaying their children's debts and have a stake in how the account is managed.

"If their name is on the credit card, then the parent has a vested interest in saying, 'Hey, my name is on this. Don't screw this up,'" says Mary Beth Pinto, a marketing professor and credit card researcher at Penn State Erie.

The credit card talk
The new law makes that "big talk" about credit and debt all the more important, say financial advisers and credit experts. Key talking points for parents to discuss with their young adult children are:

  • What are credit cards and what are the consequences of using them unwisely?
  • What is interest?
  • Why are credit scores important?
  • What purchases should or shouldn't go on a credit card?
  • What are appropriate spending limits on the cards?
Talking points for parents
of under 21 credit card users
  • Talk it over. Discuss your expectations for how the credit card is to be used. Make sure they understand what a credit card is and is not. It's not a license to shop. It is a loan and must be repaid. Explain credit scores and why they are important.
  • Set boundaries. Talk ahead of time about how much the student can charge on the card without a parent's permission. Establish a buying cap by agreeing that purchases under $50 are OK, but anything over that must be approved. Or set a daily limit, such as charging no more than $100 or $200 a day.
  • Agree on priorities. If the credit card is to be used for emergencies, determine beforehand what "emergency" means. The student may think it is buying concert tickets before they sell out while the parent may feel it is a plane ticket home.
  • Monitor activities. Most of the major credit card issuers now offer services that can help parents monitor spending. You can sign up to get e-mail or text message alerts whenever the credit card is used or if purchases exceed a certain amount. (Ask about the availability of these services before signing up for the card. Smaller issuers may not offer alerts.) Logging in to the account online also allows you to see purchasing data. This electronic watchdog can help prevent any credit card surprises.
  • Security concerns. Talk to the student about ID theft and the importance of keeping the card and the card number safe. For example, the credit card should not be left out on the desk in the dorm room or given to a roommate. Discuss the importance of notifying the credit card issuer immediately if the card is lost or stolen.

"I hope that parents would have been having those conversations with their young adult children in any event already. The co-signing requirement will force those discussions. This is a good thing," says Terry Hartle, senior vice president of government and public affairs at the American Council on Education (ACE), a Washington, D.C.,-based group representing the nation's accredited and degree-granting institutions of higher education.

Pinto from Penn State co-authored a 2001 study of parental involvement in college students' credit card accounts. It found that students whose parents were involved -- as co-obligors (or co-signers) -- had lower balances on their credit card accounts.

"When parents were the co-obligors, the students incurred less debt," Pinto says. "If the parents are the co-obligors, the tendency is the parents were sitting them down and doing the teaching. They were explaining how to use the cards."

'Start when they're younger'
She adds: "Yes, there has to be teaching going on and it has to start when they're younger. You're not going to get rid of credit cards. They are here to stay. You have to have them. You can't fight progress." Learning to use them responsibly is the practical thing to do, she says.

Card balances should be paid off in full each month, says Pinto, who has a daughter in college.

The co-signing requirement will force those discussions. This is a good thing.

-- Terry Hartle    
American Council on Education    

"We have just always talked to them about not putting more on your card than you can afford to pay off at the end of the month," she says. "Don't use it as a short-term loan. Use it for an emergency."

Make them sign a contract
Dr. John E. Whitcomb, a medical doctor and author of the book, "Capitate Your Kids," a money guide for children and parents, advocates using contracts to establish guidelines for everything from buying clothes to sticking to a family budget.

"What a contract makes you do is think through ahead of time and allows parents to say here are the rules," says Whitcomb, who recently developed a contract that parents can use to guide credit card spending by their children. The contract highlights the need to pay off the credit card every month, according to Whitcomb. (Download a sample of Whitcomb's credit card contract for parents and their young adult children.)

He recommends children borrow from their parents to pay off the monthly credit card bill in full if they can't pay it themselves. Mom and dad should charge interest on their loan -- at half the rate charged by the credit card company, Whitcomb says. The young adult would then have to stop using the credit card until the loan is repaid to the parent. Whitcomb built a financial literacy component into this contract. Young adults would have to know the terms of their credit card agreements -- that means read them -- and answer key questions about penalties, interest rates and due dates.

Young card users at risk?
Supporters of the credit card law say college students have been preyed upon by credit card marketers.

"They wallpaper all of those college hallways with credit cards because if you can get someone at that age to start using credit cards with your company, then you have got them for a long period of time," U.S. Sen. Tom Carper of Delaware said in May during Senate debate on the credit card legislation.

What the law says about credit cards for people under 21

Are you under 21? Add getting a credit card in your own name to the list of things you're restricted from doing.

The new credit card law that takes effect Feb. 22, 2010, puts limits on when people under 21 can get credit cards.

Here are the highlights of the law regarding people under 21:

  • Anyone under 21 seeking credit cards in their own names must show proof of income or other means to repay card loans.
  • If they don't have income, card applicants must get parents, guardians or other adults to co-sign the credit card application and agree to be liable for repaying card debts.
  • Credit card issuers are banned from offering free gifts (pizza, T-shirts, etc.) as inducements to sign up for credit cards while on or near campus.
  • Students who have joint accounts with parents or other adults must get their permission before increasing the credit limits on those accounts.
  • Colleges, universities and alumni associations must disclose the contents of agreements they make with credit card marketers to provide personal contact information of students and alumni.

Note: Minors are still allowed to be authorized users on their parents' accounts.

For a more detailed explanation of the Credit CARD Act of 2009, see our comprehensive guide to the law.

On campuses across the country, it's common practice to offer free pizza, T-shirts and other giveaways to students in exchange for signing up for credit cards. Students often sign up without reading the fine print to determine interest rates, fees and penalties. Students over 18 do not need permission from parents, although parents are often stuck repaying the credit card debts to keep their childrens' credit records unblemished as they enter the job market.

A study released in April 2009 by student loan giant Sallie Mae found 84 percent of college undergraduates have credit cards and half of all college students have four or more cards. The study found that about a third of college students had never or rarely talked to their parents about credit cards. The average undergraduate student credit card debt in 2008: $3,173.

"It has always struck me as odd that credit card issuers would grant credit to college students, a segment of the population with no income and no credit history upon which they can base their decision," says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling (NFCC), a national group of nonprofit credit counseling agencies.

"Since a college student is likely to make an above average income, it's just the kind of customer they want," says Cunningham. "Couple that with the fact that the parents are waiting in the wings to fix any financial mistakes, and it's a great scheme."

Limiting student access to credit?
Opponents of the college student credit card restrictions argue that they limit access to credit for students who use cards to buy books and other school supplies or as backup financing while they wait for their student loan checks to come through. Others argue it could hinder or delay the ability of young adults to establish credit histories in their own names.

As a June 7, 2009, editorial in the Michigan Daily, the University of Michigan's school newspaper put it: "The law doesn't respect the autonomy of college-aged individuals as legal adults and hurts their financial independence. Though the CARD Act has its merits, the federal government should reevaluate the need to treat young adults like children." The paper points out that many people 18 to 20 years old are independent, support themselves and do not have access to financially stable adults to co-sign for them. What happens, for instance, when the parent or guardian has bad credit?

"What if their parents won't sign?" asked U.S. Rep. Spencer Bachus of Alabama during April debate on the measure in the U.S House of Representatives. "What if they need a credit card to go to school? ... It will result in students not having the use of a credit card."

The NFCC's Cunningham says students relying on credit cards for routine college expenses should rethink their goals if they aren't paying the balances off in full each month.

"Call me old-fashioned, but credit should not be used to supplement a lifestyle beyond what your income can support -- even if the excess spending is worthwhile," Cunningham says. "Children may have to opt for community colleges, work their way through school, obtain scholarships, etc."

She adds: "I think the legislation makes sense because someone should either be truly creditworthy before being extended credit, or have a co-signer, a guarantor of the debt. Instead of allowing the college student to get his own credit card, it might be smarter to allow him to be an authorized user on the parent's card. This is still allowed, and the student can build a good credit history this way as much as he can by having his own card."

Yes, there has to be teaching going on and it has to start when they're younger.

-- Mary Beth Pinto    
Penn State Erie    

"When kids go away, if they can just go off and open any card they want, the parents have no control over it," says Penn State's Pinto.

Pinto and others acknowledge that resourceful college students may find a way around the credit card requirements, as they have with phony driver's licenses used to purchase alcohol and tobacco products. Pinto points out that credit card marketers bombard young adults with card offers at shopping malls. Many of the participants of her study got cards through direct mail offers and retail store card solicitations. The new law bans sending prescreened credit card offers to people under 21. It does not ban in-store card offers, but requires adult co-signers if applicants under 21 can't show proof of income.

All the amount of talking and parental coaching still may not be enough to steer young credit card users from harm's way. Parents should be prepared for some missteps along the way.

"Speaking as a parent, sometimes college students don't always listen. But there will have to be conversation," says Hartle of the education council.

Says Pinto: "The parents are going to have to somehow talk to them or go with them together to get the credit card."

See related: Credit card reform and you, Sample credit card contract for parents and their young adult children, Law alters cozy relationship between colleges, credit card issuers, Study: Undergraduates relying heavily on credit cards, A comprehensive guide to the Credit CARD Act of 2009, Obama signs new credit card reforms into law, Interactive timeline: How the credit card bill became law, when its provisions take effect, Will the new credit card law hurt more consumers than it helps?, Annual fees return in credit card mail offers, How to cope until the new credit card rules take effect, What the new credit card rules mean for you, New credit card rules don't cover business, corporate credit cards, Federal banking regulators finalize sweeping rule changes for credit cards

Published: July 8, 2009


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