College students face more than course credit

Parents shouldn’t be surprised to hear from their kids soon after dropping them off at college. That’s because many students still need mom or dad’s help to get a credit card.

Before last year, undergraduates could freely sign up for credit cards, with banks giving away T-shirts, mugs and other freebies to anyone who filled out an application. These days there are new safeguards to ensure teens don’t bury themselves in debt.

One regulation, for example, prohibits credit card issuers from enticing students on campus with such freebies. Another rule prohibits banks from issuing a credit card to borrowers under 21 unless they have a co-signer or earn their own income.

The changes were part of sweeping credit card regulations that went into effect last year.

The result is that parents have more say in the credit choices their kids make. As the fall semester gets under way, here are some options to consider:

Add students to an account

The simplest option for parents is to add their teen to an existing account as an authorized user. The parent remains responsible for paying the bill; authorized users have the same charging privileges but can’t request any changes to the account. In the meantime, the student gets a head start on establishing a credit history.

“The authorized user on an account immediately gets the benefits of the account’s history and credit limit,” notes John Ulzheimer, president of consumer education at SmartCredit.com.

Keep in mind that this cuts both ways, however, and not all parents have sparkling credit histories. So before adding anyone to a card, be sure that the account is in good standing and not regularly maxed out or delinquent.

If a student starts abusing his or her charging privileges, parents can easily remove authorized users by going online or calling the bank. The account would disappear from the authorized user’s credit profile, Ulzheimer says. Any impact the account was having — good or bad — would vanish as well.

For some parents, a drawback with this approach is that it doesn’t do much in the way of teaching financial independence. Parents might also want to avoid worrying about the hassles that would arise if students misplaced their cards.

Co-sign for a card

To give kids experience with handling payments, another option is for the parent to co-sign for a credit card. This is riskier because the account — and any missteps — would show up on the credit profiles of both parties.

Parents wouldn’t be able to simply suspend charging privileges either; the only way to cut off their kid would be to close the account. But if the teen is responsible enough for this approach, there is a safeguard in place that should provide a measure of comfort. For cardholders under 21, banks can’t raise the credit limit on the account without the co-signer’s approval. Keep in mind that students have to be at least 18 for a parent to co-sign for a card.

Some banks, such as Capital One and Citi, don’t allow parents to co-sign for any credit cards. But if the student is at least 18 years old and works part time, he or she may qualify for a student credit card independently. These cards usually have low credit limits of $300 or $500, so the risk of racking up debt is minimized.

“It’s almost like a credit card with training wheels,” Ulzheimer said.

Students generally have to show they have their own income to qualify. With the Wells Fargo college card, for example, applicants have to earn an income of at least $3,000 if they don’t have a co-signer.

Pay up front for a card

Another option is a secured card. Think of secured cards as a hybrid between a checking account and a credit card. These cards are typically used by borrowers who want to repair their credit histories. But parents may consider them a less risky way to help their teens establish a credit profile.

As the name suggests, secured cards require a deposit, which is usually equal to the credit limit on the account. The tradeoff is that they come with fees and higher interest rates. A Capital One Secured MasterCard, for example, charges a $29 annual fee and a 22.9 percent interest rate. But the interest rate shouldn’t be a sticking point if the balance is paid in full each month.

Prepaid cards are another option that’s marketed to parents. But these are more often used as an alternative to checking accounts because they don’t help users build a credit history. The fees can vary considerably, so it’s important to carefully review the terms before signing up.

A report by CardHub.com, a card comparison site, found that prepaid cards from American Express and Green Dot were the least expensive when used to give a student a monthly allowance. Even with both those options, however, note that ATM withdrawal fees can add up. This is because prepaid card issuers often don’t have as many ATMs in their networks as traditional banks.