01 Sep (Don’t) charge it! Educate your college-age child on the downsides of credit card debt

More than four in five undergraduates today have at least one credit card, according to a survey by Sallie Mae, a provider of college savings programs. In fact, the average college student has 4.6 cards and a credit card debt of more than $3,100, the 2009 survey found.

It doesn’t require a Ph.D. to realize that students’ understanding of credit is becoming just as important as their ability to write top-notch term papers. Without it, today’s college students could be setting themselves up with debt loads (not even counting student loans) that may take years to pay off and hinder their ability to purchase cars or homes, or even to start their careers.

Be a positive influence

To minimize the likelihood that your child will enter the real world with high credit card debt, start serving as a role model by demonstrating responsible credit card use yourself. Let your teens know that, when you use credit cards, you’re earmarking the funds you’ll need to cover the bill at the end of the month.

In addition, consider including your children in your financial decisions when appropriate. For instance, would purchasing a big-screen TV cut into the funds you’re setting aside for a family vacation? These conversations help your kids gain an understanding of the tradeoffs involved in most spending decisions, as well as the need to live within their means.

Offer a reality check

If your child is considering opening a credit account or has asked you to co-sign for an account, go through the math. Show how making just the minimum required payment every month means paying for a purchase many times over.

Be sure to emphasize that the credit history built during college can affect life after graduation. Problems with late or missed payments, which remain on a credit report for up to seven years, may affect a new grad’s ability to obtain a car loan or a mortgage. In some fields, such as banking or finance, these missteps could even stand in the way of getting a job. These employers may view a prospective new hire’s shaky credit report as a red flag.

Finally, offer your child a dose of reality. Even though many students will land a job after they graduate, they likely won’t have lots of cash to pay off old credit card debts. Instead, many will need to pay for a place to live and some form of transportation, as well as any student loans coming due. That’s before figuring in the cost of food, clothing and entertainment.

An alternative: A debit card

Before co-signing for a credit card for your child, consider having him or her use a debit card. This provides the convenience of a credit card, but it’s tied to a checking account. Unless you spring for overdraft protection, your child can’t spend more than the account’s balance.

Keep tabs on their account

If you co-sign for a credit card for your college-age child, consider keeping close tabs on it. You can do so online by logging in to the card’s account to view recent charges, the total amount and what your child’s been paying on a monthly basis.

Sidebar: The CARD Act offers protection

Several provisions of the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 provide college students new protections from overzealous credit card marketers:

• An applicant who is under age 21 needs an adult co-signer to obtain a credit card, unless he or she can demonstrate an independent ability to pay the bills.
• Card issuers can’t increase a line of credit for an under-21 cardholder unless the co-signer approves in writing.
• Card companies no longer can give away T-shirts and other freebies on or near campus or at campus-sponsored events to induce students to fill out credit card applications.
• Colleges are required to disclose their contracts with credit card marketers.