myFICO Blog

[#1]

Tips for Helping College Students Build Good Credit

The average student credit card balance is $3,173

As a parent of two college students, my idea of "back to school" has clearly taken on new meaning since I left for college in the late 1960's. Back then, tuition was $50 a semester, the plane ride from my home in Los Angeles to college in San Francisco was less than $20, and the only "card" in my wallet was a military draft card. And when I arrived on campus, there was neither a Bankamericard rep sitting at a card table offering me free pizza and a t-shirt for opening an account, nor did I know that 25 years later I would be concerned about something called a FICO credit score.

While parents may have worried about a little too much love in the air back then, at least they didn't have to worry as much as we do today about young people coming home from college with thousands of dollars in credit card debt and tens of thousands in student loan debt. According to a 2009 U.S. Department of Education's National Postsecondary Student Aid Study, about one third of all 2007-08 bachelor's degree recipients had total student loan debt of more than $20,000!

Teach Your Children the Importance of Good Credit

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<p><a href="http://ficoforums.myfico.com/t5/myFICO-Blogs/bg-p/myficoblog" target="_blank"><img title="myFICO.com" src="http://www.fico.com/landing/graphic/infographic_backtoschool.jpg" alt="Why do parents deny their children a credit card?" width="930" height="900"></a></p><p>Source: <a href="http://ficoforums.myfico.com/t5/myFICO-Blogs/bg-p/myficoblog" target="_blank">myFICO.com</a></p>

Nowadays, the combination of skyrocketing college expenses and access to credit has made it more important than ever for parents to teach their teens about financial management. It's become as big a parental responsibility as some of those other uncomfortable-but-necessary topics we force ourselves to discuss with our teens. Like it or not, we owe it to them to provide as much of a head start with successful money management habits as we do helping them with a college education. Earning a good grade for credit habits will allow students to graduate with a good credit score that will earn them good rates on their first car loan.

A recent survey of parents with college-age kids conducted by myFICO.com found that nearly half (47%) were unaware of a provision within the recently enacted Credit CARD act of 2009 that prohibits banks from issuing credit cards to young people under 21, unless they provide a co-signer or proof of the ability to pay.

Additionally, according to the same myFICO.com survey, approximately 25% of these parents did not give their children a credit card because they were worried it would damage their credit. So, while parents may be somewhat uninformed about the Credit CARD act of 2009, a lot of us do understand the dangers of easy credit and the importance of maintaining a good credit rating.

These statistics show the hard reality today for undergraduate students and their finances:

• 84% of the student population overall have credit cards.
• The average student credit card balance is $3,173.
• 30% of students put tuition on their credit card.
• When surveyed, 40% of college students said they've charged items knowing they didn't have the money to pay the bill.
• One third of students rarely or never discussed credit card use with parents.

Tips for Helping College Students Build Good Credit

If you are a concerned parent, myFICO.com suggests that you use any of the following topics to open that discussion with your college-bound teenager:

Credit unions

Many colleges have credit unions offering good rates on student loans and secured credit cards, and are oriented toward servicing the unique financial needs of college students.

Online banking

Using online banking, your teen can easily monitor credit card and checking account activity, as well as set up automatic payments to avoid late payments which are one of the biggest contributors to a lower FICO score. By setting up automatic payment alerts, your teen can be reminded to pay recurring bills, – cell phone bills, for example – on time each month.

Secured credit cards

For people with no credit history or a poor credit rating, secured credit cards offer an opportunity to build a good credit rating with very little risk to either the lender or secured card holder. Ideally, students should secure their card with their own money, since putting some "skin in the game" will help create more discipline.

Authorized user accounts

If you add a teen to one or your credit card accounts as an authorized user, your teen will have access to your line of credit but you still will be legally responsible for repaying it. By reviewing your card bill you'll be able to monitor and guide your teen's use of that credit appropriately. The card account will appear on your teen's credit report and instantly become part of his or her credit history, since he or she is now participating on that account with you.

Credit reports

Students can go to www.annualcreditreport.com to see what is on their credit report. They're entitled to one free report per year from each bureau, and the credit bureaus have well-established processes for correcting any errors.

These suggestions only begin to scratch the surface, but you get the idea! The more we can teach our college-bound teens about using credit wisely, the better they'll be prepared for the changing and challenging futures that await them.

What do you think?

Share your advice and learn from other parents in our myFICO Forums online community.

Related Resources:

• myFICO Credit Education Center
• Minimum Requirements for a FICO Score
• Understanding Your Credit Reports and Scores Booklet
• Credit Facts for Teens

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Author: Barry Paperno serves as community manager for the myFICO Forums and consumer operations manager for FICO, where he has advised consumers and businesses on FICO credit scoring since 1995.

[#2]

One option (which credit card companies would hate) I feel would greatly benefit the owner of the credit card compared to authorized users, if there was some sort of approval process for charges on the card.

Let me provide you an example:

In your online banking / credit center, there would be an AU options page you could access.  One of the options would be to set a maximum transaction amount per item.  For instance, setting it at $30 would mean that the AU on the card, could not make a single purchase larger than $30.  If they try to do this they would be declined.  That would put the mindset of the student of not being able to make any large purchases which could jeopardize the card holder.

Now something that might be completely farfetched at this point would be if the AU tries to make a purchase larger than $30, an instant text could be sent to the card holder with the ability to reply to approve the transaction.  This sounds all well and good... but you don't want to be sitting in the check-out line for 15 minutes as you wait for an approval.  But hey, that's just t a thought! :)

[#3]

Cyan007,

I love this idea! and why 'could'nt' we do it? We wait longer than that in lines for price checks now! The AU option is doable completely and with todays technology and wifi phones, scanned checks etc. this would be perfect.

[#4]

I like the idea of secured cards for teens. The idea of AUs though to me is along the lines of teaching kids biking (good) also on the pedestrian crosswalks (bad).

The teen will feel good about a secured card, as in It's mine and I have earned it. The AU translates into Well, I'm really just an add-on, and I certainly don't feel like being monitored.

In a recent article about teenagers texting and driving, it was common that they don't listen to adults, but they do listen to their fellow teenagers. I say let's give them credit where credit is due!

[#5]

Actually, Amex has the option to set a spending limit for AU's with email alerts if your AU reaches that limit, so you can either keep it or raise it... not exactly what you mentioned, but close.

Quote from Amex help pages:

Spending limits may be set, removed, and modified at any time. You may also freeze an account to suspend spending on it altogether, and you may unfreeze it at any time. The spending limit refreshes each billing cycle

You can assign a spending limit for each of your Additional Cards, giving you more control of your account while giving your Additional Cardmembers the flexibility to enjoy virtually all of the same benefits of your Card

One, you can receive an alert when Additional Cardmember reaches a certain level of spending. You can choose to be notified by text message or e-mail. At that time, you may immediately modify the spending limit

[#6]

Looks like there's already been some substantial effort put into implementing a consumer-controlled credit card charge-authorization system of sorts, as reported in this New York Times article.