The Credit CARD Act of 2009 largely curtailed the access to credit cards by college students. The new law requires that the issuer verify that the young student has the means to repay and service a credit card issued not otherwise co-signed by a parent. This means verification of employment and certain wages relative to a reasonable credit line. Previous to the Credit CARD Act, bank credit card issuers would mine the college campuses for future cardholders, often holding t-shirt give-aways in order to attract new borrowers. Criticism of the credit card industry levied accusations that the card issuers were largely responsible for significant debt levels among young college graduates and high default rates when these young borrowers found themselves unable to discharge the heavy debt loads in a satisfactory manner.
Parents often cringe when they think about a young college student holding a credit card in his/her own name. Largely due to unrestrained spending, college students can find themselves with a lot of debt after graduation. Everything from late night eateries to beer, spending for that new homecoming formal, as well as necessities like books and supplies can fill the pages of the credit card statement. Even with the new credit card law, borrowers who pay just the minimum payment on a credit card each month will find out quickly how much debt and interest can accumulate.
At the same time, holding a credit card can be a hard-taught and valuable lesson for young adults. Holding a credit card teaches responsibility, spending management, and discipline. These skills will be necessary as a young student takes on his or her first job and tries to start to live independently.
Most credit card issuers will allow a parent to add a card to his or her account in the name of a dependent student. This means that while the student holds and uses the card with his or her name embossed on the front, the parent continues to receive the monthly statement and retains responsibility for the payments due. Getting the statement is key – the student cannot spend in an unrestrained manner as long as the parent remains vigilant and uses the occasions of some binge spending to counsel his or her young adult. This is an opportunity to talk about spending beyond one's means and the value of saving for a large purchase.
At the same time, allowing your college student to have a credit card can give a parent peace of mind. When my child moved 1,000 miles away to attend college, I knew that emergencies might arise. For example, my daughter has used the credit card for car repairs – a tire repair actually – and she has used the card at the student health center on her campus to pay for a prescription when she got the flu in the fall. She is expected to contact me prior to using the card and a certain amount of discretionary spending is allowed – a dress for an upcoming formal, for example. At the same time, she is expected to reimburse us (or we take it from the money we give her for food and lodging) for spending on entertainment and other frivolous spending. She has a campus job, though she works minimal hours, and holds a summer job that sources her money for books and supplies for the school year.
When we receive the bill, we review with her the payment due date and she can log into the bank issuer's website to view the bill. She can also pay it electronically on the issuer's website from her personal campus bank account. We hope this helps her learn the discipline necessary to pay her future obligations on time and in full.
Overall, we have found the positive teaching opportunities to outweigh the risks and have permitted our college age student to hold a credit card issued from one of our accounts. We believe that establishing an understanding of credit and the discipline necessary to manage personal financial obligations is an important value.