Co-Signing for Credit Cards: 5 Things To Discuss With Your College Student
June 07, 2010
As if you didn't already have too many financial issues to mull as you send your kid off to college, new credit card regulations give you one more matter to consider. Should you co-sign for a credit card?
Previously, college students were deluged with student credit card offers when they arrived at school, but the Credit CARD Act of 2009 put an end to marketing on campus--and banned issuers from giving accounts to young people under 21 unless they can prove they have sufficient income to pay the bills or they get adults with good credit to co-sign.
Credit cards come in handy at college, and students who use them wisely get a head start on building good credit scores.
Risks of Co-Signing for Credit Cards
But the decision to cosign shouldn't be taken lightly. By co-signing, you're putting yourself on the hook if your student can't pay, and you're putting your own credit on the line. Before, when students got credit cards on their own, they bore the black marks on their credit reports if they maxed out their cards or missed payments. Now, as a co-signer, your credit reports are stained, too, if your student makes credit card mistakes.
The average college student had more than four credit cards and carried a balance of $3,173 in 2008, according to the latest study of college credit card use by Sallie Mae. Seniors graduated with an average credit card balance of $4,100. More than half of students in the survey said they were surprised how high their balances grew, and 40% said they charged items knowing they didn't have the money to pay for them. Only 17% said they regularly paid off all their credit cards each month.
Clearly a little financial education is in order. Here are five must-discuss points to cover with your kid before you agree to co-sign a credit card. (For more credit card tips for college students, point him or her toward 10 Best Credit Card Tips for College Students.)
1. Getting the Best Credit Card Deal
Look for a credit card with no annual fee and with the lowest possible interest rate. Even if your kid swears he'll pay off the card every month, chances are he'll carry a balance at some point during college.
2. Credit Card Budget
Discuss your expectations about credit card use--how much he or she can charge and for what purchases. Is it for emergencies? If so, what constitutes an emergency?
3. The High Cost of Interest
Use an online financial calculator to demonstrate to your college student the danger of paying only the monthly minimum payment. Most minimum payments are between 2% and 4% of the balance, plus interest. It would take more than 12 years to pay off $3,000 in credit card debt at 16% interest, assuming a minimum payment equal to 3% of the balance.
4. The Dangers of Being Late
Late payments trigger penalty fees and, if they're more than 60 days late, spark interest rate hikes. They also count against you on credit reports.
5. Why Maxing Out a Card is a Bad Idea
Maxing out credit cards hurts credit scores. Financial experts advise keeping credit card balances below 30% of credit limits.
Finally, because your credit is at stake as much as your child's, ask your kid to share account information so you can keep an eye on the balance.