I recently helped my 13-year-old daughter open her first bank account, complete with checks and a debit card. We have agreements in place on her use of the card and the checking account, and we will go over her statements monthly.
This is a first step for her in learning good money management in the adult world. As she gets older and begins earning more money and making more of her own decisions, she’ll have more freedom in how she uses her account. By the time she gets to college, we hope she’ll have enough experience to manage wisely on her own.
One thing she shouldn’t be able to do as a college student is use a credit card to get into debt over her head. One provision of the new credit card rules that take effect this year is to make it harder for those under 21 to get approved for cards. Credit card companies have some new restrictions on marketing to college students. In addition, lending institutions must require co-signers for those under 21 unless they can prove they are employed or have another source of income.
As with all legislation, the new credit card rules will have some positive and negative consequences. One result of the co-signing rule that should be a plus for credit card companies is having someone else to tap for payments if young people abuse cards and run up debts they can’t or won’t pay.
This rule exposes parents to more liability, because in the past only the child was responsible for any abuses. This isn’t necessarily a negative, because it may mean parents will monitor their kids’ cards more closely and intervene before their spending gets out of control.
One of the problems with being a cosigner, however, is that you typically don’t have control over the debt instrument. I wasn’t able to find out whether the cosigner on an underage person’s credit card will have the authority to cancel the card. This would definitely be a question to ask the credit card issuer before agreeing to cosign. If parents could cancel the card, this would help avoid a situation where a child continues to run up debts and the parent, despite being responsible for them as a cosigner, would have little say over the card’s continued use. If not, it would make more sense to have a joint card so parents could cancel it if needed.
A more important question, however, is whether college students who are still at least partially dependent on their parents financially should even have credit cards. I don’t think they should for everyday purchases. I certainly could see an “emergency” card for kids who have demonstrated fiscal responsibility.
I would prefer to have a student use a debit card, especially with the new regulations on overdrafts. Banks can no longer routinely allow debit card charges that overdraw customers’ accounts, and then charge high overdraft fees. Instead, such debit card purchases would be rejected unless account holders specifically agree to allow overdrafts and pay the fees.
One argument used by both credit card issuers and young people eager to have their own cards is the need for young adults to build a credit score. I don’t see this as a valid reason to have a credit card. Quite frankly, we as a country need to focus more on becoming more cash-based. What better time can there be to start than when someone is young?
Learning to manage without credit can teach young adults some important lessons in money management that will help them manage credit well when they do need it.