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Credit 101 for the College-Bound

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Holly and Ben from Ohio are about to reach a major milestone in their life—their son is headed off to college.  Fortunately, they have been setting aside money for many years in an education fund, so tuition (for this year, at least!) is covered.

Given his university is about four hours from their home, they would feel more comfortable knowing their son had access to a credit card that he could use for emergency situation.  They wanted to know what is the best approach for getting him a credit card that will also have the added benefit of helping him begin to establish a credit history.

While there are several options for their son to get a credit card, the most common approach is to place him on one of your existing credit cards as an authorized user.  It’s an easy process—simply call your credit card issuer to make the request.  Note, your account will need to be in good standing with the bank before they will issue a new card to your son.

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This approach allows the minor to have the convenience of having a credit card in their name while the parent still has control and contractual liability for making payments (and can see what their child is charging).  A great advantage with this approach is that it can be used as a means to educate the minor on how to properly use a credit card.

While not contractually liable for payments, the card information is reported to the credit reporting agencies for both the primary (the parent in this case) as well as for the authorized user (the son in this case).  An advantage of this is that the minor starts to build a credit history, which should help them more easily get access to credit once they have reached 18+ years of age and can contract for credit on their own.  Note, once a credit history is established for a young adult (18 years old), they become an attractive prospect for lenders who would like to establish a relationship with the individual who is new to credit.  At 18, they are legally able to contact for credit on their own—if they pass the lender’s credit criteria.

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The passage of the Credit Card Responsibility and Disclosure Act of 2009 provides some peace of mind for parents, as it has rules that make it more difficult people under age 21 to get access to credit cards.

  • People under age 21 must obtain the signature of a parent, guardian or “qualified individual” willing to assume responsibility for the debt in case of default.
  • Credit card issuers must gather information that demonstrates the young adult’s financial ability to pay his or her credit card debt.
  • Applicants must complete a certified financial literacy or financial education course, including awareness of the trouble credit cards have caused other young people.

In addition, there are limits on credit card marketing targeted to people under the age of 21. This applies to both pre-approved credit card offers that appear in mailboxes and to credit card solicitors on college campuses. Alas, the days of getting a free baseball cap or t-shirt with your school logo just for applying for a credit card on game day are no more.

What’s important for the young adult to understand is that becoming an authorized user is not 100% risk free.  Any negative information (a missed payment or the carrying of high balances for example) that are the result of the primary card holder’s behavior would be reported on both the primary and authorized user’s credit reports, and could have negative impact on the credit scores of both people.  So make sure you only agree to be an authorized user with someone you know and trust.

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Image: Mathieu Plourde, via Flickr.com

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