Bills, budgets, spending temptations, lines of credit -- across the country newly minted co-eds are facing these adult money issues on their own for the very first time. To help kids ace Money 101 -- and avoid graduating with a killer financial hangover (or bankrupting the Bank of Mom and Dad, for that matter) -- here's what they need to know.
Back in the day (as in last year around this time), credit cards were as easy as candy to get on campus. Sorry, kiddos, those card blanche days are over.
Free T-shirts, Frisbees, and unprotected exposure to plastic are gone (or at least harder to come by), thanks to new credit card laws. New provisions from the Credit CARD Act of 2009 keep credit card marketing on campuses at arm's length (or actually, 1,000 feet's lengths).
Trust me, that's good news. Ask just about any grownup about their biggest financial regret from college and the answer will be: "Plastic." (Consider the $45,000 plastic albatross one of my colleagues ran up over the years.)
If you are under the age of credit consent (it's 21) the only way to qualify for a credit card on your own is if you can prove you have the means ("a job" or "a trust fund that spits out a handsome dividend") to pay the bill on your own. Barring that, you'll need an adult co-signer to get a card. (Attention potential adult co-signers: Do not sign the dotted line until you read the warning below.)
What's a credit-strapped kid to do?
Short answer: Use cash (or cash-equivalents like a debit card or pre-paid credit card).
Don't be in such a rush to prove that you're creditworthy. Building credit takes time. Ruining your credit is a piece of cake.
When you're young you don't have any padding in your credit history to smooth over little mistakes. So every action -- every late payment, credit application, maxed-out month -- is amplified. The damage done by a few small slipups now can take years to undo.
We're not just talking about your ability to get plastic in the future, either. Landlords, employers, some insurers, and lenders with whom you want to consolidate your private loans all make business decisions based on what's in your credit file. Consumer reporting agencies and data brokers keep records of everything from your health to your wealth – and a lot more (here's a sample of what they're tracking).
A crummy credit record is like a badmouthing wingman who points out every flaw beneath your charming facade. Good luck shaking him: He's going to stick around for at least seven years to remind everyone who inquires about your bad credit behavior.
All that said, mom and dad may want you to have a plastic safety net for emergencies (e.g. actual "I'm stranded roadside and need to pay for a tow" emergencies, not "awesome sale at Abercrombie!" quote-unquote emergencies). If so, here's how to establish a squeaky-clean credit record.
How to play your first card right
If you do get a credit card (on your own or with a co-signer), don't be a slacker. Treat it like a debit card and pay off that sucker on time every single month. End. Of. Story. Play by the rules now while it's early in the game, and your good behavior serve you well for years to come.
Parents: Don't co-sign away your credit reputation. Are you ready to hand over the keys to your credit reputation to your child? That's what you'll be doing as a co-signer. Remember, if Junior pays the bill late, goes over the limit, or otherwise mismanages that card for which you co-signed, that bad behavior will show up on both of your credit records.
To keep an eye on activity you can request that a copy of the bills be sent to you as well as your child. But your power is limited: If things get out of hand, you have no authority to close the account. So you better be on speaking terms if you want to cajole your child into doing so. Ultimately, if your kid can't pay the bill, it's on you as the co-signer to settle the debt.
A better strategy is to give your child some practice handling credit without putting your credit at risk for their bad behavior. Here are three ways to do that:
- Give them credit with training wheels: A pre-paid credit card. Like a debit card, a pre-paid credit card limits their spending to the amount loaded on the card. Some pre-paid cards report activity to credit bureaus (thus helping your child build a credit history), but not all.
- Make your child an "authorized user" on your card. Although you are solely liable for the activity (which is why you should have the bill sent to you so it gets paid on time), as an authorized user your child will have access to your line of credit (emergencies only, kids!). Some card companies will report credit activity on the authorized user's credit report which will help them build a credit history. On the flip side, if mom and dad's credit goes downhill, the sins of the parents will be passed down to Junior. So both parties need to proceed with caution.
- Co-sign for a secured credit card. Secured cards require that the cardholder put down a security deposit for the amount of the credit limit. Your child will still have to pay the bill on time -- secured cards do report to credit bureaus -- but if they are unable, the lender will use the security deposit to cover the tab. Secured cards are notorious for their high fees. Still, those fees may be a lot cheaper than paying for the privilege of carrying plastic with your credit reputation.
Here's more for the whole family on building, managing and fixing your credit:
- Why Credit Cards Will Still Burn You
- How to Fix Credit Boo-Boos
- How to Boost Your Score in Months
- Credit Rules for Singles, Couples, Families, and Seniors
Fool.com's Dayana Yochim graduated college (Rock Chalk Jayhawk!) with only minor financial bruising thanks to in-state tuition and the lack of plastic in her wallet. The Motley Fool has a disclosure policy.