Don't co-sign on a credit card for your college student

One of the results of the credit card reform legislation that recently went into effect was a dramatic change in the ability of college students to access credit. Anyone under the age of 21 will now need, according to the bill, "financial information. . . indicating an independent means of repaying any obligation" in order to sign up for a credit card.

What exactly that even means is ambiguous. Ben Woolsey of tells WalletPOP that "The Federal Reserve hasn't explicitly defined income requirements but rather has left that up to the individual issuers."

Some banks may require a payroll stub or bank statement, and others may ask the applicant for the name of the employer and annual income. According to Woolsey, a full-time student with an annual income of $5,000 could "probably" qualify for a credit card -- but with a limit of no more than $500.
Given that, most parents probably won't need to co-sign for their kids to get credit of some kind -- and given that many parents really only want their kids to have cards to start building credit, there's really no reason to have a balance of more than $500.

But parents of students who are unable to get credit cards because of the new law will face a quandary that was non-existent just a month ago, when banks were handing 754 credit cards to any student who could name one member of the cast of Jersey Shore.

To co-sign? Or not to co-sign?

I'll make this easy: No, you should absolutely not co-sign on a credit card for your college student, ever. Never. Surprisingly, the Bible actually has advice on this topic. Proverbs 17:18, in the New English Translation, reads "It's poor judgment to guarantee another person's debt or put up security for a friend." But if you're still not convinced, here are a few more reasons not to co-sign:

  • If Junior is late on the payments, your credit score will get hit -- which could cause you to pay higher interest rates on other loans you might take out -- if you can get them at all. Wouldn't it be funny if you couldn't buy a house because your kid decided to play the "I'm going to throw all my mail from Bank of America in the trash and see what happens" game?
  • If your kid decides not to pay, you will be 100% responsible for the bill. If he files for bankruptcy, he's off the hook: but you're not.
  • You establish a bad precedent. You want to be a source of financial help and wisdom for your kid: not the person who helped him start his relationship with an industry that has led more Americans down a path toward poverty than any other. If you want to help your kid, give him cash and/or advice: not credit!
Here are the two most common arguments people make for co-signing loans/helping their kids get credit:

  • "What if he needs the credit card for emergencies?"
If he needs access to cash for emergencies, set up an emergency fund with $1,000 in cash and give him a debit card with strict instructions never to use that card unless he's in a jam with a baseball bat wielding bookie and he's tapped out all other sources of cash. If you can't trust him to do that, then ask yourself: Why would you trust him to use a credit card "only for emergencies?"

  • "He needs to start building up his credit history."
No, actually he doesn't. Here's the truth. Good credit scores get people into at least as much trouble as bad credit scores. Consider these lists:

Smart Things You Can Do With a High Credit Score

  • Buy a house (and for first-time home buyers with FHA loans, you don't even need that high of a score). There will be plenty of time to build up credit history after he has a source of income and doesn't need a co-signer.
  • Possibly get marginally lower rates on car insurance and a cell phone plan. But mainly, consumers are likely to be penalized for having a bad score (repossessions, defaults, etc.) as opposed to a limited credit history. According to Consumer Reports, drivers with top scores pay up to 31% less on their insurance premiums, but people with bad scores can pay as much as 143% more.
  • Rent an apartment, but here again, what landlords are looking for is the red flag of a history of defaults and landlords left high and dry -- not a recent college grad who never had a credit card. Having a limited credit history will not be a problem in the search for an entry-level apartment for a recent college grad. Alison Rogers, a real estate agent and the author of "Diary of a Real Estate Rookie," recommends that recent grads without credit may want to offer landlords some additional evidence of responsibility like a reference character reference from a teacher or spiritual leader.
Stupid Things You Can Do With a High Credit Score

  • Cancun!
  • Buy a boat/car you can't afford to pay for with cash
  • Get one of those TVs they have in airport sports bars
  • Lease anything
  • Absolut Vodka? Abso-freakin-lutely!
  • Birthday parties at high-end restaurants with fifty of your closest friends
  • Dolce & Gabbana, Fendi and Donna Karan
  • Pec implants
  • Take out a private student loan.
  • Post ex-boyfriend's bail
  • Co-sign loans for people
  • Overspend: Studies have shown that you spend more money when you swipe a card than when you pay with cash.

And remember: Your college student probably can start building his credit -- if he thinks that's a smart thing to do and can manage the card responsibly -- with a small limit based on whatever part-time work he has -- without a co-signer.

Bottom line? I've talked to lots of rich people and I've talked to lots of broke people. I've never met a rich person who is rich because he had a credit card during college.

But I have heard from literally hundreds of people in their 20s and 30s who are still digging out of the financial mess they created in college with the help of credit cards. And if you think you're doing your kid a favor by helping him jump in front of that steam roller before he has any income, you better think again.

Zac Bissonnette's book "College On a Dime" will be published by Penguin in the fall. He is a junior at the University of Massachusetts, Amherst.
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