Getting a college credit card was easy back in the day. Issuers flocked to the segment, which in 1990 represented a block of 14 million people and is currently north of 20 million. I recollect that well-intended parents allowed credit cards to facilitate money movement, meals, and bookstore purchases. Still, the attractive nuisance of a credit card often resulted in free spending and extracurricular purchasing.
In short, the college cardholder was off on their own, and card spending commitments frequently fell prey to help fund beer, pizza, and other delights.
Credit card issuers loved the market. These customers were at a unique stage in life: they are of age but not necessarily grown-up. The cardholder will be off on their own in less than four years and will never forget their first credit card. Hopefully, as their life develops, the new consumer will likely need auto loans, mortgages, personal loans, deposit products, 401k, and wealth management products, making the first lender an essential starting point. The initial relationship with a lender is as sticky as a first boyfriend—you never forget them.
In many cases, parents could keep their kids out of non-payment trouble, which would tarnish their credit bureau file until they were 27 or 28 years old. A few bucks to bail the student out and a stern lecture always seemed to do the trick—at least until the next semester started.
What a deal! I’ve been there, done that, and got the T-shirt. The temptation and potential pitfalls are just a swipe away. That’s why I’m here to share my insights and advice.
The CARD Act of 2008 Changed All This
This CARD Act significantly altered the landscape for college students seeking credit cards. It introduced new requirements, such as an Ability to Repay standard or a parental (or guardian) endorsement, making it more challenging for students to obtain credit cards.
Prudential regulators and consumer protection agencies like the CFPB and FTC are critical to banking. I agree with almost everything prudential regulators say because safety and soundness are essential for the economy. I don’t always agree with consumer protection agencies, but if you think back, they earned their stripes with proper strategies on complaints, product design, and fairness standards.
However, the CARD Act brought a sense of security. It mandated that college students pass an Ability to Repay standard or have a parental (or guardian) endorsement. This parental involvement was a welcome change, ensuring the student’s financial safety and securing a more responsible financial future.
How the Credit Card Right of Passage Changed
In today’s Market & Finance section in the WSJ, the author discusses card changes and explains how old-school college marketing, with tables, balloons, Frisbees, and freebies, went away. Students probably do not miss out on pizza and beer but no longer have access to easy credit cards. However, the card is still essential in establishing a credit line, ultimately leading to a cherished FICO score.
Do What I Did. It is Simpler and Safer, and You Will Sleep Better
Forget about sending a student to college with a credit card in hand or co-signing. Instead, limit risk and load up a debit or prepaid card for them. Living within a budget is an essential life skill.
If you want your child to establish credit, add them as an authorized user on one of your cards early in life. This starts their credit file, and if you limit their access to the card and don’t let them take it off to college, everyone will be better off. It won’t let them get pizza and beer, but it will help them start with a referenceable credit line.
Let them experience a credit card in a controlled situation, build their credit score, and then lock the card in the family safe.