College Kids and Credit Cards: What Every Parent Needs to Know

**This story has been updated to reflect additional reporting.

Moises Mari, a 24-year-old senior at Rutgers University, got his first credit card at 16 by lying about his age on the application. "None of my friends had one, and I wanted to be the first," he says. "I was surprised how easy it was to get through the system. I was issued one within a few days."

The era of “No Student Left Behind: Credit Card Edition” will come to an end early next year, thanks to the new credit card law. (Starting in February, the law restricts students under 21 from signing up for their own cards.) But, in the meantime, college kids now arriving on campus may see issuers making one last-ditch plastic pitch through offers of free pizza, iPods, or T-shirts. “These are very large businesses, and they can’t sit back and do nothing or their businesses will shrink too much,” notes David Robertson of the Nilson Report, a credit card analyst. So a little friendly parental advice from you couldn’t be timelier.

College students are just as hooked on plastic as their parents. Some 84 percent of college students have credit cards — more than half have four or more — and the average balance is $3,173, according to a survey by student lender Sallie Mae. (That’s on top of the $19,999 median loan debt for undergrads.) Many students seem unable to rein in their card use. More than three-quarters carry a monthly balance, and 60 percent in the survey said they were surprised how high their balances had reached. They are, in short, a card issuer’s dream: young, plastic-addicted, and willing to carry a balance into eternity.

Financial experts disagree on whether a college student should have a card. Some say having one can help a young adult learn how to manage credit responsibly, build a credit history, and provide peace of mind to his parents in an emergency. Greg McBride, senior financial analyst at Bankrate.com, believes if students “are responsible enough to handle credit and have proven they can balance a checkbook and pay their bills on time, they should have a card.” Others say kids are too likely to incur serious interest charges and may send payments late, making it hard later to get a car loan or mortgage.

So follow these tips before letting your kid sign up for a card:

Know thy child.

Are you confident your child understands that a credit card is a loan, not a magical extension of his buying power? If you think your child isn’t ready for the responsibility, get him a debit card linked to his checking or savings account. That way, the cost of any purchase with the card will be immediately deducted from his balance. Since no money is borrowed, there’s no danger he’ll get into credit trouble. And if the debit card is linked to one of your accounts, you can quickly transfer money online if necessary. Just be sure he realizes that overdrawing an account with a debit card can lead to a hefty overdraft fee of up to $39.

On the other hand, Stacey Bradford, who writes CBS MoneyWatch’s Family Finance blog, points out that this fall represents the last chance for a child who is really ready to have a card to build a credit history of his own. So a debit card isn’t the answer for every kid. The operative phrase is “really ready.”

Try training wheels first.

If you think your student is ready for a card, but you’re a little nervous about the prospect, sign him up as an authorized user on yours. That way “you can monitor his activity and not receive any ugly surprises,” says Adam Levin, chairman and founder of Credit.com. He recommends showing the student his charges on your bill, so he’ll get into the habit of thinking about the price of something before charging it.

To make your child an authorized user, call the card issuer and ask. The card will have only his name on it, and he’ll be able to charge only up to your credit line. He won’t have online access. Assuming you pay your credit card bills on time, his credit score will benefit from this piggybacking. But this credit history is temporary; it disappears as soon as you take him off your card as a user.

Clarify terms.

If the card is only for emergencies, be clear about your definition of “emergency” — in case his consists of buying tickets online for a Decemberists concert before they sell out. If the card is just for school-related expenses, explain that means books and supplies, not midnight pizza runs.

Guide the choice of a card and its usage.

Once your student has proven he can intelligently handle his debit card or your credit card, consider letting him get his own credit card. Explain that paying off the card’s balance in full and on time is mandatory and what can happen if he doesn’t; late fees are now around $39, and a late payment can trigger an interest-rate hike, too. Explain, also, how interest charges pile up if he makes just the minimum monthly payment. This should make the point: If he carries a $3,000 balance at 18 percent interest and pays just the minimum payment, it’ll take him almost 19 years to pay off the debt and he’ll owe $3,977.85 in interest.

You may need to quash a common misconception among students: that carrying a balance helps improve your credit score. “That is truly an urban legend,” says credit expert Gerri Detweiler, co-author of Reduce Stress, Reduce Debt. “Your credit report won’t even say whether you pay in full each month. It will only list your credit limit and the ‘current balance’ — the balance reported on the day the issuer sent its information to the credit agencies. Your credit score will be strongest if that balance is 10 percent or less of the available credit.”

Stick with cards that have no annual fees or application fees. The interest rate will likely be higher than on cards with fees. But, remember, he won’t owe interest if he pays the balance each month. Start the card hunt by looking into cards from credit unions, which typically have lower credit limits and better terms than big banks and often help late-paying student borrowers get back on track. (Becoming a credit-union member has become easier than you may think, though you may need to join to make your student eligible.) One typical card: Tower Federal Credit Union’s no-annual-fee MasterCard with a fixed APR of 10.9 percent and a $1,000 maximum credit limit for students.

In general, interest rates on student cards from banks are higher than on comparable adult cards (or become that way after the introductory rate expires) because of the applicant’s typically short or nonexistent credit history. Wells Fargo has a no-annual-fee College Card (Visa) that starts with a 5.9 percent rate for six months and then rises to 11.65 to 21.65 percent, depending on the student’s credit qualifications. (Wells Fargo offers a free movie ticket if the student takes two online tutorials on managing credit after receiving the card.) The no-annual-fee Discover Student Card has a 14.99 percent rate for the first six months, then it becomes variable.

Have him set up payment reminders.

Students with their own cards should sign up for online account access and alerts notifying them when payments are due. College kids are a forgetful bunch. “If they are 30 days late, that will affect their credit for seven years,” notes Detweiler.

Warn about identity theft and credit cards.

Each year, more than half a million people between 18 and 29 are victims of identity theft, and many are undergrads. Because students rarely check their credit reports, they’re ideal victims — their credit gets destroyed before they’re even aware of it. The online account access will notify them if a large purchase has been made, so they can notify the issuer if they didn’t make it.

Be sure he gets his free credit reports annually.

Detweiler urges students to do this to ensure that their credit usage is accurate. “Your credit report is your real-life report card,” she says. And with employers increasingly checking credit histories before hiring, a bad credit history could cost your child a job. Order reports from the major credit bureaus through the government’s officially sanctioned site, Annualcreditreport.com.

Finally, stay away from co-signing your kid’s card.

You’ll be responsible for any late or unpaid charges, which can wreak havoc with your own credit score.

Moises Mari would agree. Though he never got in trouble with his cards, he saw other family members did, and resolved to do things differently. Now an eight-year veteran of credit card ownership, he pays his balance in full, but notes his fellow students often "don't have the knowledge they need. They think a credit card is free money."

More on Moneywatch: