In a tradition seemingly as old as homecoming, credit card companies cover college campuses each fall, eager to tempt teenagers and twenty-somethings into applying for a card and potentially spending money they don’t have.
But after this school year students heading to college could have a harder time getting charge cards once new credit card rules are in effect.
Here is what less 'extra credit' will mean for students.
Charging Times They Are a Changin'
With new credit card legislation set to take effect next year, credit will not be available to those less than 21 years old if they can’t provide proof that they can pay off their balance, for example by having an income or savings.
If there is no proof, a parent or other adult will be required to co-sign on the student’s account, putting their own credit in jeopardy if their child were to default.
For these students, secured credit cards, which require a cash deposit in the amount of the credit limit you seek, may be the best option.
Unlike debit cards and prepaid credit cards, secured cards help you build up credit, since your activity on these accounts is reported to the credit bureaus. However, a secured card still works like a credit card, meaning you’re still charged interest when you carry a balance, says Ken Lin of Credit Karma, a credit card information and education site.
Why the Changes Are Good
Using a credit card while in college has been encouraged since it can be used as a tool to help young spenders to learn financial responsibility. That is, if they can use it wisely, says Lin.
If you start using credit cards at 18, by the time you’re 19 or 20, your credit score could be in the 700-range, which could get you a credit limit of about $5,000, possibly more, Lin says. And if your credit score is around 740, you can get an interest rate of as low as 9%, a tempting idea for a newly independent consumer.
Overall, new credit card rules protect consumers from hefty late fees, high interest rates and reduced credit limits. Plus, marketing to attract credit-seekers under 21 will be restricted, which is expected to prevent younger spenders from racking up too much debt too early.
If a parent is a co-signer on a credit card, they’d have to be notified of any credit line increase, which could make a student likely to be more conscious of their spending activity.
Why the Changes are Bad
College students don’t just rely on credit cards for clothes shopping and alcohol. Some students need them to pay for books and use them to cover everyday expenses like meals, to avoid “having to eat ramen [instant noodles] throughout college,” Lin says.
And one consequence that may not have been anticipated by supporters of the legislation is that “what we’ll find is that five years from now, there will be a lot of people with thin files,” or no credit score, Lin notes. And if you don’t build a credit history while you’re in college, “when you’re 22 or 25, when you apply for an auto loan or a down payment on a home, good opportunities could be hard to come by.”
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