What person between the ages of 18 and 20 wouldn’t want a credit card? Unfortunately for them, the recent Credit CARD Act may make it harder than ever before.
Are the new limitations really so bad? There was a time that card issuers were dishing out credit cards to college students as fast as you can say “freshman.” Studies indicate that the early issuance of credit cards hasn’t been fair to one of the involved parties… the youth. In fact, the passing of the Credit CARD Act was dedicated in large part to the protection of young consumers. In general the Credit CARD Act was meant to prohibit some of the unfair credit practices and deceptive credit offers out there, which keep consumers perpetually in debt.
As many of us know all too well, credit mistakes made while you’re young lead to years of misfortune. It’s true that some young folks are able to manage finances responsibly, but others need the safety net the Credit CARD Act provides.
Studies by Sallie Mae, the leading provider of student loans, indicate that college-age card holders may not have the best financial practices, because of little to no formal education or real world experience. Most break the number one rule of credit cards: 82 percent carry a balance and incur financing charges monthly as a result. Further, 60 percent of undergraduates experienced ‘surprise’ at how high their balances reached; and 40 percent said they charged items knowing they didn’t have the money to pay the bill.
Who wants to learn about debt the hard way?
There are still ways young people can gain access to credit. In particular, the following four options should be considered:
• Become an authorized user on an existing card. Becoming an authorized user on a credit card is great because it gives you access to credit, but it will not help you build credit history. As an authorized user, you have no legal obligation to the debt you rack-up, which is might not the best deal for the responsible party.
• Have an adult co-sign for a new card. The co-signer option represents a greater risk to you because there is a legal obligation to repay any debt and delinquencies. To co-sign a loan or credit card means what’s mine is yours and what’s yours is mine. As the co-signer, you take full responsibility for all charges and any debt or payments are equally your responsibility as well as the responsibility of the younger party. Failure to make your payments will be recorded on credit reports for all parties.
• Get a secured credit card. A secured credit card is a very safe way for young people to use credit, but it requires a large sum of money up front. In short, you set your credit limit by depositing a set amount then you cannot spend any more than that.
• Have a sufficient independent income. No matter your age, if you have sufficient income you can open up a credit card account on your own. Just try not to carry a balance because you’ll be forced to pay interest.
Common sense says that young adults shouldn’t take on credit card debt before they are financially independent. Buying stuff, even if it’s something practical like text books, isn’t worth a ruined credit score.