4 credit options for new college students
By Erica Sandberg
July 10, 2015
My daughter Zoe is off to college in the fall. She is a responsible girl, having worked all throughout high school and during the summers. She saved a lot of her earnings. I would like to reward her with a credit card for her to use, at least in the first year. How do I do this? My husband and I don't use credit much, and we only have one card between us. It is a Discover card, and I believe it has a $1,000 limit and no debt. Thank you. —Janice
What a lovely gesture! If Zoe is like most young adults, she will appreciate being able to make purchases with a card. Here's how you can give her such a gift.
1. Help her get her own credit card. When to comes to credit, independence is best. If Zoe has her own account and makes a mistake with it (even highly responsible people do sometimes), she will be the only person impacted. A hurdle, however, is her age. Presuming she is between 18 and 21, credit card law — the CARD Act — stipulates that she will have to prove to the creditor that she has enough income to support a credit line. What she'd need to earn varies by issuer, but it is possible that a job she holds now or while enrolled in college will be sufficient.
With Zoe, check out the variety of student cards that are currently available. Also review secured credit cards. She can use some of her savings for a refundable deposit, and the issuer will grant her a credit line that matches that sum or even exceeds it.
2. Co-sign on a new credit card. The other option, as per the CARD Act, is to guarantee your daughter's account with your good name. It's not ideal, though. You will be as liable for it as she is, so if she forgets to make a payment or maxes out the card, your credit rating will be negatively affected. Worse, if the balance goes seriously delinquent, it could end up in a collection agency, or the company can sue either or both of you. Given your daughter's past, this may be unlikely, but always recognize the worst case scenario before making a decision.
Set rules, too, such as what Zoe can use the card for and how much of a balance she's allowed to carry over. I recommend she pay it to $0 every month. You need to keep abreast of what is going on with the account by checking statements often, and address any problems quickly.
3. Attach her to your credit card. Most credit issuers allow the owner to add people to their accounts as guests. If you made Zoe an authorized user, she would have full charging rights but none of the legal responsibilities. The account would show up on her credit report as well as yours, and as long as all payments are made on time and the balance stays far below the credit limit, everyone should be happy. Her credit rating will increase, putting her in a better position to obtain a card in her own name down the road.
If you go this route, adhere to the advice I gave about rules of use. This is your account, so be careful!
Once Zoe's credit rating is built and her age is no longer a factor, have her apply for her own credit card. At that stage you can disengage by closing the co-signed account or removing her from authorized user status.
4. Consider a prepaid card. Lastly, there are rectangular prices of plastic that look like credit cards but are debit cards that you or she fills up with cash. There is no borrowing involved, so its history won't be recorded on either of your credit files. Just make sure it's guaranteed by Visa or MasterCard, so she can use them anywhere these companies are accepted.
Prepaid cards are risk-free practice tools. She'll become habituated to managing an instrument that requires a close watch on balances. It can force her to always spend mindfully, thus preparing her for real a credit card — her own or one that's attached to you.
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