We’ve all heard nightmare stories of college kids running up huge credit card bills, so how do you make cash available while controlling the purse strings? This fall, there may be some answers.
Credit card issuers have come under intense criticism in recent years for peddling cards to college students who weren’t prepared to use them responsibly, and studies have shown that many students graduated with thousands of dollars of card debt.
The Credit Card Accountability, Responsibility and Disclosure Act, passed last year, now prevents under-age students from obtaining cards unless the application is co-signed by someone over 21, like a parent, who is capable of paying off the debt. Many colleges have also restricted or prohibited card marketing on campus.
Now it’s easier for parents to keep track of what’s going on. They still have a choice, however the choice is now between giving the child a credit card or debit card, each of which has its own pros and cons.
The chief benefit of the credit card is the ability to borrow money in a pinch, up to the credit limit. That could come in handy if the student is stranded by a broken-down car, or stuck in an airport during a blizzard.
Also, using a credit card can help a student build up a credit history. This can prove valuable after graduation, when a young person may need credit cards, a car loan and even a mortgage. But misusing a credit card during the college years can make future borrowing more difficult. So obviously, the benefits of the card will depend on the student.
You’ll also see ads for “pre-paid” credit cards. Although they look like credit cards, they work just like debit cards, with the user able to draw only as much money as has been put into the account in advance.
The typical debit card is linked to a checking account in either the parents’ or student’s name. With a debit card, there are no interest charges and late fees, since there’s no way to carry a balance from month to month.
Most debit cards can provide overdraft protection, allowing the user to spend more than the account holds, though fees can be high. Under the CARD Act, the account holder now has the right to decline overdraft protection. If you opt out, your purchase will be refused. Embarrassing, but not costly.
Most major banks now have an array of services that make it easy for parents to monitor a student’s use of credit and debit cards. The parent can check the account online to see how the money has been spent and how much is left before reaching the credit limit on a credit card or emptying the cash in the debit card account. You can quickly replenish either type of account with an online transfer.
And many banks have automatic alert systems that will send you an email or text message at certain thresholds – credit card spending above a given limit or debit card reserves getting dangerously low.
One option is to provide the student with a credit card and keep a tight rein on spending, but allowing a responsible student to build a credit history. Then, if card use gets out of control, you can cancel the credit card and issue a debit card.
—For more ways to save, spend, invest and borrow, visit MainStreet.com.