Understanding The Credit Cards For College Students
For several years, credit cards for college students have been easy to qualify for. The purpose for credit issuers was to create new customers for future larger accounts that would be profitable. For that future profit potential, banks created cards with low limits ($500-$1000 is common) and higher (than usual) interest rates and approved them for students who had no source of income.
Working Fine in Theory But in Practice...
In theory, it would be a way for students to learn how to use credit wisely before venturing into the world of jobs and business and having to pay their own way. By having credit accounts with reasonably low limits students would ease their way into using credit wisely. This worked very well (in theory).
However, in practice, it resulted in many college students graduating with their credit rating already in shambles. Many high school graduates head for college with no idea of how to spend money. They've relied on parents, used their parents credit cards, been given money when they wanted it - and have never made the connection between what you buy on credit and what you owe in debt.
Never Ignore The Bills!
A common trait of those who haven't learned to budget is the tendency to ignore the bills when they become a problem. When it becomes a crisis, parents often step in to pay the bill but the damage to the student's credit still exists. In fact, the damage goes farther than credit ratings.
For the student taking charge of his own life for the first time, making purchase decisions and being in control of his personal finances, it's crushing to admit to Mom and Dad that he couldn't do it right. Much of our self image comes from feeling independent and money management is often seen as the line that separates the child from the adult.
The easy availability of credit cards for college students has been so accepted that any visit to a campus during the week of initiation and registration would find major credit card companies with booths set up encouraging students to sign up for a credit card.
For students with a healthy respect for money and the ability to spend carefully, these cards provide a head start on establishing a personal credit rating that would help the student when he enters the job market.
The low credit limits and higher interest are risk mitigation factors necessary for the financial institutions. They considered the low limits sufficient for student lifestyles and the high interest rate was meant to discourage irresponsible use of the accounts.
Prior to college credit cards, students would have credit available only through their parents. They could be a designated user of their parents' credit account but it did nothing to build financial history for them.
The credit cards for college students program worked fairly well until the recession began and resulting growth in unemployment put many of these accounts into default. Unable to find jobs after graduation, many former students were unable to meet credit obligations and the default rate on college credit accounts skyrocketed.
New Laws Will Protect You Better
New laws that will take effect in 2010 reduce the risk to both lenders and students. Lenders will no longer be able to promote college credit cards to students with no income to repay. They will be able, however, to get credit in their own name by having a parent or guardian guarantee payment on the card.
The new restrictions are a positive step for students and will reduce the number of young people who begin their working careers with black marks already against them financially. By requiring a parent to co-sign for a student with no regular income, the new law adds a layer of financial protection.
