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A Taste for Credit

Sending a child to college this year? You need to do more than buy dorm room goodies, top up cell phone minutes, and encourage serious studying. You need to prepare your undergrad for the onslaught of credit card offers that bombard today's coeds when they reach campus.

When I got my first credit card, I was a freshman in college and utterly broke. Dangling the promise of $500 was like offering a trip to Hawaii to someone who didn't have bus money to ride around town. Suddenly, I could join friends in their quest to find Williamsburg's best all-night diner, offer gas money when we went on road trips, and get my hair cut by someone other than my roommate. It was great. But, in retrospect, I shudder to think how little I really understood about credit cards, credit ratings, and the perils of the minimum payment.

Nothing catastrophic -- a collections issue or damaged credit, for instance -- happened to me as a result of that first card. But it did do something more insidious: It gave me a taste for credit. That's exactly what credit card issuers are counting on when they target college students: the continuing lure of easy credit, as well as loyalty to the company who issued that very first card.

The perils?

  • Higher interest rates. While the credit card industry will argue that they deserve higher rates for extending credit to students (no income requirements attached), the true reason is far less seemly -- they know that college-aged folks aren't yet savvy about comparing interest rates, making it easy to tack on an extra half percentage point or so above average. Teaser rates may make students think they're getting a good deal -- but wait until the rates vanish after six months or one late payment. Credit card companies also know that dear old Mom and Dad may be counted on to bail Junior out of any major screw-ups.
  • Multiple cards, more ways to mess up. These introductory credit cards aren't overly choosy. How could they be when they're targeting people with no income? So your favorite college student is likely to receive multiple offers for cards -- and take out more than one credit card -- despite the lack of means to pay off one balance, much less two or three. In fact, according to Nellie Mae, of the 78% of undergrads who have a credit card, 32% have four or more. Yikes!
  • The credit card companies have long memories. College students often don't grasp how long a spotty repayment history or an accumulating balance will follow them around. Negative entries on your credit report stick around for seven years, so when freshman year is long gone and your child is searching for an apartment and applying for a "real" job, a bad credit report can limit future success.

It's not all doom and gloom when it comes to credit cards, however. There are definitely reasons for your student to secure some credit to be used in a safe and responsible manner. For one, parents like the feeling that their college student will be covered in case of an emergency (jonesing for an extra large from Papa John's doesn't count); for another, they cite less dire but still important circumstances like needing to make travel reservations, shop online, and establish a credit history. (Note that a credit history is important but may be established other ways -- via utility accounts and the like.)

Like it or not, your college student lives in a world in which securing credit eventually is less of a luxury than a necessity. But let that first education come from you, not the school of hard knocks and lousy FICO scores.

Want to send your favorite undergrad off with some good advice? Check out some of these articles:

This article is adapted from theMotley Fool Green Light "Money Answers" archive, which features more than 100 articles on personal finance topics such as taxes, credit, and beginning investing, organized by subject and life stage. For access to this content -- plus the current newsletter, back issues, members-only discussion boards, and advisor blogs -- take a free 30-day trial today!  

Fool contributor Elizabeth Brokamp is a licensed professional counselor who regularly talks money with her honey, Robert Brokamp, editor of The Motley Fool'sRule Your Retirement newsletter. The Fool has a disclosure policy.


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