Cards provide spending options for college students

Editor’s note: Third in a series of articles on paying college costs.

The campus credit card free-for-all is over, brought to an abrupt halt by the double-whammy of recession and tight new regulations. College students are no longer getting bombarded by marketers handing out T-shirts and other goodies in exchange for filling out applications at the book store.

Giveaways were among a host of tactics that contributed to the majority of college students having four or more credit cards in 2008. Freebies were banned by a new law that also limits who can get a card. Now banks can’t open accounts for applicants under 21 without getting proof they can pay the bills or have a co-signer as a backup.

These limits are aimed at reducing the amount of credit card debt students carry. Graduates in 2008 owed an average of $4,100, according to a study by student loan company Sallie Mae. College kids were also known to pay a disproportionate number of fees for mistakes like late payments, and to carry balances, said Ben Woolsey of Creditcards.com.

One way to make sure kids have some financial backup in case of emergencies is for parents and students to discuss their options and make a choice of which type of card suits them best.

There are a handful of choices:

Credit cards

Students who have a job during the school year or work during breaks may earn enough to qualify for a card on their own. One advantage of having their own card is an ability to start building a credit rating. But they can also do damage if they’re not responsible about making on-time payments.

Even if they qualify on their own, parents may want to monitor their kids’ activity to make sure they’re handling their new credit properly. That can be as easy as sharing the password for the account so both can access the account online, or having paper bills sent home rather than to a school address. Advising a student to set up automatic payments can help keep the account current and avoid dings to a young person’s credit score.

A co-signed account handled properly can also help a student build credit. Another plus is that a parent with a strong credit history may be able to secure a better interest rate on a card than a student can alone. But the co-signer is ultimately responsible for payments if the primary account holder fails to make them. Another option for parents is to add their child’s name as an authorized user on their own credit card. This can be done without applying for new credit, but does pose a danger for an uncontrolled spender.

Debit cards

Studies show the under-30 crowd is by far the most comfortable with debit cards. And it’s their use for everyday purchases that caused many to unintentionally rack up expensive overdraft fees, but a new law should help keep those penalties at bay.

Debit’s main advantage is that spending is restricted to the amount in the linked bank account.

But these cards also have drawbacks, including a somewhat higher risk for losses if the card is lost or stolen, because the cards link directly to bank accounts. Although most banks limit a customer’s liability, it could take time and tie up funds while the problem is sorted out.

Debit’s main down side is they’re capped by the amount in the linked account, which means they’re only useful in an emergency if the account has a large enough balance. One way around that problem is to link the card to a line of credit or a secondary account that can be accessed if necessary. The drawback here is that there’s no way to limit when that backup account is tapped.

Prepaid cards

Refillable prepaid cards are rapidly growing in popularity as consumers seek to avoid debt. These cards can be used in place of debit or credit and are backed with whatever amount is deposited on them.

Students can’t build a credit history using prepaid cards, but the cards can serve as a backup plan for those who can’t get a credit card – and for parents with damaged credit ratings who can’t co-sign. Prepaid cards can be refilled online, so the inevitable “please send money” phone call can get a fast response.

The big downside for prepaid cards is fees. Some issuers charge multiple fees for activation, checking balances and even each transaction, so it’s important to check the terms before you buy.

Another downside is that like debit, prepaid spending is limited to the amount deposited. That means if the card is intended to cover emergencies, the available balance might become an issue.