Question: Is it smart to co-sign on a credit card for my college freshman daughter?
Answer: Honestly, it depends on the maturity of your daughter. There has to be an understanding that the credit card is for emergencies -- and a new pair of shoes or dinner out with friends does not constitute an emergency.
It's difficult for someone under 21 to obtain a credit card on their own. Under the Card Act, anyone 21 or younger must demonstrate sufficient income to make the monthly payment. However, there is benefit to co-signing on a credit card, instead of listing her as an authorized signer.
The length of your credit history accounts for 10 percent of your credit score, so helping to build a positive credit history with a credit card may benefit your daughter after she graduates from college. You also can use the card to educate her on the responsible use of credit. Make her responsible for some, if not all, of what she charges. Stress the importance of paying the bill on time, which accounts for 35 percent of a credit score.
Provide your daughter with some education on credit card use. Make sure she understands what happens if the bill is not paid in full each month. Explain that a credit card does not replace and is not income. In addition, explain that the payment history and activity on the card will be on her credit report. Negative information stays on a credit report for seven years. Irresponsible use and payment on the credit card could affect her ability to seek employment or qualify for additional financial aid.
If you're leery about sending your 18-year-old to college with a credit card in hand, consider a secured credit card. Available at most banks or credit unions, a secured credit is like a traditional credit card, but attached to a savings account. The amount of money in the savings account is the limit on the card. If the bill is not paid, the bank withdraws the money from the savings account. The idea is to charge a little on the card each month and pay the bill off to improve your credit rating. Make sure the bank reports the payments made on the card to one of the three credit bureaus.
There typically is an annual fee on a secured card, so compare rates between banks.
It's also good to send your daughter off to college with an explanation of budgeting. Make sure she understands how much money she has to live on each month. If she doesn't think that will cover her needs, then encourage her to look for part-time employment that won't interfere with her school work.
If you need budgeting assistance, check out the Budget Builder tool at www.onlinebudgetadvisor.com. It is a good way to walk through step-by-step, how to set up a budget.
Assist your daughter in figuring out how much money she will need each month for expenses and come up with a plan to meet her needs -- a plan that doesn't include charging up a credit card.
Heather Murray is manager of education and resource development for Advantage Credit Counseling Service (dba Consumer Credit Counseling Service). For the Agency's services, visit www.advantageccs.org; or to access the free online budgeting tool go to www.onlinebudgetadvisor.com. Email Ms. Murray at firstname.lastname@example.org. Ms. Murray tries to reply to all inquiries but, because of the volume of questions she receives, she cannot always respond.