In a little less than two weeks we’ll be putting our daughter on a plan to London, where she will be studying and working a journalism internship for eight weeks.
It’s such an amazing opportunity for her, but one full of lots of details and new things to learn about. One of the many things on our to-do list was to get her a credit card, so she would have more than just her checking debit card as a form of payment overseas.
The timing is good, as she’s 21 years old and heading into her senior year of college. Soon she’ll be applying for jobs, getting her own insurance, and possibly renting an apartment or buying her first car. Having a good credit history can help will all of those things.
As we were educating ourselves on credit cards for students and young adults, I decided to reach out to two of the most knowledgeable women I know of on the topic, Gerri Detweiler and Beverly Harzog.
So who are these women?
Gerri is the Director of Consumer Education for Credit.com. She has authored or co-authored five books about debt and credit, regularly speaks on those topics, and is the host of TalkCreditRadio.com. You can real Gerri’s full bio on her site, GerriDetweiler.com.
Beverly is a credit card expert, consumer advocate, and former CPA. You may have seen her in her appearances on Fox News, ABC News Now, or CNN Newsource. Her advice has also appeared in a number of print publications and on popular financial websites. Beverly’s full bio can be found on her website, BeverlyHarzog.com.
I asked them each the following questions.
Q. Should students/young adults have a credit card?
Gerri: Yes. A credit card is a great way to establish a credit history and it’s also the safest way to shop online, pay for recurring payments, etc. One of the factors in your credit score is the age of your accounts; so the sooner you start the sooner you can establish a “seasoned” credit history. That doesn’t mean you need to go overboard though. One card is enough.
Beverly: I do think it’s important that young people establish a good credit history. If they graduate from college with a good credit history, they’ll have a smoother transition to ‘real’ life. For instance, it can be difficult to rent an apartment without good credit. People with good credit also pay less for car loans and health insurance. So while you don’t want to encourage a college student to use their credit card for a shopping spree at the mall, you do want to promote a healthy respect for credit and how it can benefit them.
Q. What is a good age or life stage to get a first credit card?
Gerri: Because of the Credit CARD Act it’s harder than it used to be to get a card before they are 21. If you are between the ages of 18 and 21 you’ll either need to show you have the ability to repay the debt or get a cosigner. I am not a big fan of cosigning – even when it’s between a parent and a child. If anything does wrong on either end it will affect both signer’s credit histories. And it’s nearly impossible to remove a cosigner from an account without closing the account.
Beverly: Honestly, it depends on the child. This is one of those times when I think you shouldn’t pay too much attention to the experts. As the parent, you’re the expert on your child. Only you can decide when your kid is ready for the responsibility. Some kids are ready for a credit card when they leave for college. Others aren’t ready until their senior year of college.
Having said that, I do recommend some “plastic training” while they’re in high school. Get your child a checking account and a debit card. I took this approach with both of my kids when they were 16. It gets them used to the idea that they are, indeed, actually spending money when they hand over that card. This is an important connection to make before they get to credit cards. Oh, and don’t “opt in” for over-draft protection. This way, if your child tries to overspend, the debit card gets rejected.
Some folks like to use prepaid cards for this, but in my opinion, a debit card is the better choice. It’s good for your child to begin having a traditional relationship with a bank. Plus, a debit card is usually cheaper.
Q. What should they look for in a credit card?
Gerri: Hanging onto your first card can be beneficial for your credit history. For that reason, choose a card carefully. I suggest one with no annual fee since every penny counts when you are starting out. You may want to choose a card with rewards, but I wouldn’t get too focused on that in the beginning since you want to use your card sparingly until you are sure you can handle it responsibly.
I also don’t see a reason to load up on retail credit cards as a student. They’re tempting – especially with that initial discount they offer when you open an account, but it’s easy to feel like you’re not spending real money and buy things you wouldn’t purchase if you only had cash.
Beverly: I think it’s fine if they want rewards, but at this point, it’s important to focus on using the card responsibly with the goal of building a very good credit history. The interest rates are going to be a little high, in most cases, simply because young adults are considered a credit risk until they prove otherwise. So it’s essential that your child understand what compound interest is and how quickly it adds up. One thing I like about Discover and Capital One is that they have educational centers on their websites to help young adults manage credit responsibly.
At the end of the day, though, kids learn from their parents. So parents need to take time to really educate their kids about credit. I can’t stress this enough. Go over all the fine print with your child and make sure they understand when the payment is due, what can happen to their credit if they make a late payment, and so on. Once your child has the card, explain how to use a free money management tool, such as Mint.com, to track expenses and set up payment reminders.
Q. Are there any credit cards you would specifically recommend for this group?
Gerri: Yes you can see some cards we like here: http://www.credit.com/credit-cards/student/
CitiForward and Discover are good cards for starting out.
Beverly: There are several student cards on the market that are pretty good. The Discover it for Students Card has rewards, which is nice. But it also forgives the first late payment. We all hope our kids won’t make mistakes, but trust me, they will! So it’s nice to have a cushion. This card also offers a zero percent introductory APR for the first six months. Again, a little bit of a safety net if your child needs time to get used to making payments.
I also like Capital One’s Journey Student Rewards Credit Card. This card gives students 1 percent cash back on all purchases. But what I really like is that it gives students a 25 percent bonus on the cash back they earn each month if they pay their bill on time. I like the positive reinforcement with this card.
For a young adult who doesn’t qualify for a student card, I recommend getting a secured credit card that reports to all three major credit bureaus. There are several good ones on the market right now. With a secured card, the young person puts a deposit, say $300, in an account. The card issuer uses the deposit as collateral. The young adult then gets a credit card with a credit limit that matches the deposit (some cards will allow a limit slightly higher than the deposit). This is a fairly safe way to build credit. I like to think of this as a credit card with training wheels.
Thanks so much to Gerri and Beverly for sharing their expertise.
Do you have experience with getting a first credit card, either for yourself or your child? Let’s talk about it in the comments.