In the past, banks spent college welcome weeks in booths peddling cards with killer interest rates to students with no income. Now, federal rules keep them off campus and prevent them from giving credit cards to students without jobs or assets.
Still, cards find their way to college students, often through their Facebook profiles. Banks entice students through games and prizes, said Odysseas Papadimitriou, chief executive of CardHub.com, a site that compares credit cards.
Have cards, use cards. About 35 percent of college students have credit cards, and three-quarters of those have them in their own name, according to a recent survey by lender Sallie Mae. Only a third pay their cards off each month; 42 percent carry balances of $500. Three percent carry $4,000.
Parents who want to keep tabs on children in college can get credit cards for their offspring in both their names. The interest rates on cards aimed at students average 16.3 percent, said Papadimitriou; CardHub.com provides a list of the best cards for students at http://tinyurl.com/8qyd8gy. Parents must guarantee payments; if they're missed, the parents' credit scores will take a hit.
Yet, rather than urging parents to oversee student credit cards, Papadimitriou thinks parents should steer their children to "secured cards," so the students learn to stay within a budget and be responsible, making timely monthly payments.
With secured cards, the students can charge only as much as the sum of money that's deposited in advance. So, for example, if a student deposits $200, it remains security for the bank, and the student can charge up to $200. That student then makes regular monthly payments to pay off any purchases up to $200.
Think of the $200 like a security deposit for an apartment. If the student makes card payments in a timely manner, and eventually closes the secured-card account, the deposit will be returned.
Thinking ahead. Papadimitriou likes secured cards such as Capital One Secured because a student who pays reliably builds a credit history - a necessity after college to get other credit cards, rent apartments, or borrow for purchases like cars. He urges parents to have their children make the security deposit so they have money to lose if they get sloppy with payments.
The drawbacks: There are fees for secured cards, and they can also be a hassle. A student who needs to buy a $300 airplane ticket home but has deposited only $200 as security won't be able to buy the ticket until another $100 is deposited.
I prefer the simplicity of a debit card, instead. As long as there is no overdraft protection on it, the student won't be able to spend any more than what is in the checking account.
Ideally, before leaving your child at college, you will teach how to watch a balance in a checking account daily, to make sure there's enough to cover debit-card purchases. And you encourage setting up a budget for all expenses. (For a detailed calculator that will walk you through a year, try http://www.bit.ly/Soo8bH.)
Papadimitriou notes that debit cards lack protection if stolen, and that your children won't be building credit histories with debit cards. But credit histories also can be built by making student-loan payments on time.
Gail MarksJarvis is a personal-finance columnist for the Chicago Tribune. Contact her at firstname.lastname@example.org.