The Color of Money: Basic lessons on credit cards for students

Sunday, August 22, 2010

Entering freshmen at colleges across the country will be the first class of regular-semester students to face credit card restrictions under the Credit Card Accountability, Responsibility and Disclosure Act of 2009.

To open a credit card account if you are under 21, you will need to show that you have the income to make required payments or get a co-signer 21 or older who has the ability to do so. Once you have a card with a co-signer, if you want a higher credit card limit, the co-signer must agree in writing to the increase.

Credit card companies are prohibited from marketing credit within 1,000 feet of a college campus. This limit would include related college events, such as concerts or athletic competitions. Companies are also banned from offering certain "tangible" gifts.

But I wonder how successful the law, also known as the Credit CARD Act, will be.

Credit marketers will find plenty of locations near campus to pitch to students. The companies might not be able to offer a free T-shirt or stuffed animal, but they can entice students with discounts, reward points or promotional credit terms, according to final rules released by the Federal Reserve.

I'm sure plenty of parents are convinced that their kid needs to establish credit, so they will be all too willing to co-sign for a credit card. By the way, the Federal Reserve says that anyone 21 or older -- not just parents, legal guardians or a spouse -- can co-sign for younger students to get a credit card. This means older siblings or even college friends could co-sign. But no one should ever do this.

Co-signing doesn't mean you are the backup borrower: You are equally responsible for the debt. Unless you are prepared to treat any charges as your own, don't co-sign.

I've long advocated that college students who are not employed full time shouldn't have credit cards. It's possible for them to get through college using just cash and a debit card. Trust me -- I've seen it happen, even with a student who studied abroad. Although there are tougher credit standards now, credit issuers are still pursuing young adults.

The age restrictions and co-signer requirements of the CARD Act were meant to teach students financial restraint. But if they can still get through the loopholes in the law, the efforts to help them steer clear of credit card debt will be for naught.

Yes, I know many kids are financially responsible and can handle credit. I hear from parents all the time who think it's important to expose their children to credit as a means of teaching them how to manage money.

However, using credit only teaches you to be a debtor. I know all too well the consequences of putting a credit card -- with little or no supervision -- in the hands of a financially naive young person. I hear their horror stories long after the pizza, clothing or spring-break charges. With credit, they learn how easy it is to live above their means.

But I know I'm swimming against the tide. So, if you're determined to co-sign for a college student, at least be sure that he or she has a good understanding of how to use credit as wisely as possible.

To help you with this conversation, (a really informative Web site) has posted information about the section of the CARD Act pertaining to students. Search for "How credit card reform impacts young adults under 21." You'll also find on the site a credit card contract for parents and adult children created by John E. Whitcomb, a doctor and author of "Capitate Your Kids." You can also download the contract from Whitcomb's site at

The contract calls for parents to show the child how to pay off the balance every month by scheduling regular sessions to review the credit card bill. The son or daughter agrees, among other things, to stick to an agreed-upon spending limit and to pay off purchases or services by the next billing cycle. If the bill is not paid in full, the card will be canceled immediately.

If you're just going to sign this contract, tuck it away and not enforce its terms, don't bother. If you're determined to allow your child to get a credit card and you're serious about making this a teachable moment, however, this contract is a great way to emphasize the child's responsibilities and yours as a co-signer.

Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

Comments and questions are welcome, but because of the volume of mail, personal responses are not always possible. Please note that comments or questions might be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.

© 2010 The Washington Post Company