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
Trust me, that's good news. Ask just about any grownup about
their biggest financial regret from college and the answer will be:
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
Do not sign the dotted line until you read the warning
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
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
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
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
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
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
Here's more for the whole family on building, managing
and fixing your credit:
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
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