Experts Warn College Kids Against Excessive Credit Card Use

With colleges classes starting many families may be considering how best to give their kids some spending power while they’re away at school.

If the plan is to extend you kids access to an existing credit card account, or to grant them one of their own, then experts warn caution must be used, according to a report from the Associated Press. Often, college kids with some amount of financial and personal independence for the first time in their lives may make missteps that lead to lots of credit card debt they may not be equipped to handle.

Parents could make their kids authorized users on their own accounts, but not all parents have sparkling credit histories. 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. 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. 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.

Thanks to new consumer protection laws passed last year, consumers under the age of 21 cannot open credit card accounts without having an adult co-signer or providing adequate proof they can afford to pay their bills by themselves.

Prepaid cards may be another option, 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, 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.

Recent studies show the average college student now graduates with several credit cards and a few thousand dollars in debt.