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Four Options for College Students Seeking Credit


What the new legislation means for the youngest borrowers.

When the Credit CARD Act takes effect later this month, one of the major provisions is the restriction on marketing credit cards to young adults under 21.

"Right now, it is easier for a college student to get a credit card than to get up for class," says Bill Hardekopf, CEO of and author of The Credit Card Guidebook. "College students use credit cards to pay for everything, just like their parents. Once this new law takes effect, many college students will have difficulty getting a credit card."

Beginning February 22, issuers are not able to offer free merchandise to lure students to sign up for a credit card on college campuses, at college sponsored events (like sporting events), or within 1,000 feet of the campus. In addition, the CARD Act bans credit cards to people under 21 unless there's an adult co-signer or the young adult can show proof they have the income to pay the debt.

"The regulations leave 'sufficient income' open to interpretation," Hardekopf says. "Some issuers will just want to know that your monthly income is more than your minimum payment due. However, students need to assess their own situations. If you are struggling to pay for your own food, housing, transportation, and education bills, you can't afford to carry a balance on a credit card."

Credit lines will also start out low. If there is no co-signer, credit lines will be $500 or 20% of the student's annual income. If the student has more than one card, the credit line from all credit cards will be up to 30% of the annual income.

College is a good time for students to learn how to correctly use credit cards and build up their credit score. However, many students are unprepared for the responsibility.

A 2009 Sallie Mae (SLM) study showed that college students used credit cards more than ever before. 84% of college students have at least one credit card, up from 76% in 2004. The average amount of debt carried by college cardholders is $3,173, which represents a 46% increase over the 2004 figure of $2,169. The average student has 4.6 credit cards.

Only 17% of college students pay off their entire balance each month and 1% had parents or other family members paying the whole balance. The remaining 82% carried balances and paid finance charges each month.

Parents must educate their students about using a credit card. One-third of students polled rarely or never discussed credit card use with parents, and nearly all undergraduates would like more information on financial management topics.

"Parents can make the co-signing for a credit card a very teachable moment," Hardekopf advises. "Tell your student how to deal with credit cards and the pitfalls that exist. Explain how to read the monthly bill and how important it is to pay the balance in full at the end of each month. Give them real-life examples of the credit card mistakes you have made so they can avoid making the same mistakes."
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