College kids & credit cards
By TERRY SAVAGE email@example.com or @TerryTalksMoney August 22, 2012 7:20PM
Updated: May 3, 2013 12:15PM
Q . My daughter is going away to college and I think she needs her own credit card. She has been able to use one of
my credit cards for the past few years, and has been very responsible. But with her own card, I wouldn’t see the bills and I’m worried about her getting into debt.
A. You’re right on two counts: Your daughter does need to establish credit in her own name. And you’re right to be worried, because it’s all too easy to be tempted to overspend when you have plastic that is willing to accommodate. So here are a couple of solutions that give the best of both worlds.
You could get your daughter a “secured” card, which is a card that is backed by a deposit in a savings account at the issuing bank, and can be used wherever major credit cards are accepted. The amount of her line of credit on the card would be limited to what’s in her savings. As she pays her card on time and in full every month, she will start to build her own credit record.
You can find secured credit cards by going to bankrate.com and clicking on the credit card tab. Then use the “Find a Credit Card” feature and search for secured cards. You’ll notice that each card has its own features, so compare to find the one appropriate for you:
◆ Annual fees: These can be steep, ranging from $39 per year to a seemingly innocuous $9.99, but even more expensive, per month. They are the price of this discipline. And one day when your daughter has learned this lesson, she can find a less expensive regular credit card.
◆ Interest rates: There are two interest rates on each card. The first is the rate charged if you do not pay the balance in full each month. Point that out to your daughter, because the rates can be steep. The second is the rate they pay on your savings deposit — at this point, mostly nonexistent! This is a good lesson in the true costs of debt.
◆ Starting deposit: You’ll find cards that require as little as $200 for a starting deposit, sometimes called a “refundable security deposit” or set up as a separate savings account. But this is a pretty short leash, so most issuers let you start with a deposit of up to $3,000. Remember, this is like giving your daughter a “line of credit,” so think about how much you want to put into the account. You can always add money as her needs increase.
There is an even easier solution to your situation — a product offered by certain Visa card bank issuers. This card is a reloadable debit card that is linked to your bank checking account or credit card. It is offered by several banks and you can sign up online at visabuxx.com. Each Visa Buxx issuing bank sets its own terms and fees.
The card allows you to easily, and automatically, transfer an allowance from your own checking or credit card account to your child’s credit card. And you can make additional transfers at any time.
Best of all, both you and your child can view the account activity online and in real time. So if you get an SOS requesting more money because books are so expensive, you can go online to see where all the money was really spent! Your child can use the card wherever Visa cards are accepted, at merchants and at ATMs to withdraw cash. And in an emergency, you can easily transfer more money.
You’re right to walk the line between parental oversight and financial responsibility. And these products are the right way to get your teen accustomed to spending wisely, budgeting, receiving a monthly statement, and understanding the dangers of debt.