August Newsletter, 2008

Credit Cards 101: Tips For Parents And Students

By Joseph Pisani, CNBC.com

Credit cards and college students are a dangerous combination.

And with the start of college just days away, there's still time for a quick primer course.

"A large share of students get their first credit cards in college," says Dr. James Roberts, a marketing professor at Baylor University . "They put them in the back of their mind and don't pay off their balances: It ultimately leads to financial problems in the future."

Fifty-six percent of college students carry four or more cards, according to Nellie Mae, a student financial aid firm. By senior year, nine out of ten have at least one. The average outstanding balance is $2,864.

Graduating with credit card debt or missing payments can have a negative impact following graduating, affecting your credit worthiness and even job opportunities.

"If you do screw up your credit," says Emily Davidson a financial expert at Credit.com, "it's going to haunt you for years."

Given those dire consequences, we've assembled these tips to help parents and students stay out of credit card debt.

Parents, Start early. Getting a teenager a credit card while in high school may be a way to build good habits. Parents can and should always watch over the card and sit down to speak with the child every month when the bill arrives.

Explain late payments. One of the most common misconceptions among college students is late payments, says Dara Duguay, director of Citi's office of financial education and author of "Please Send Money! A Financial Survival Guide for Young Adults on Their Own." She says many college students think that if they miss a payment the only consequence is a late fee; parents need to explain that there are also interest charges and that late payments can be reported to credit bureaus, which will damage your credit score (and take several years to repair.)

Only one bailout. Whether parents should bail their children out of credit card debt is up to them, but if you do decide to pay of the debt, Duguay suggests limiting it to one time only. Parents also need to explain that it will only happen once, otherwise they will never be financially independent.

Students, Avoid on campus credit card offers. Getting a card from a table on campus, giving out free shirts is a bad move because you're not comparison-shopping for cheaper cards, says Davidson.

Instead, she suggests going to a Website (try sites like credit.com or bankrate.com ) to compare different cards and their interest rates to insure you're getting the best deal.

Lower credit limits. If the credit card company ups the credit limit on a card, Duguay recommends calling the credit card company and asking them to lower the limit to an amount you're more comfortable with. "The more you have available," she says "the more you're going to charge."

Leave home without it. "If you feel you need one [a card]," says Roberts, "use it only for emergencies." He suggests leaving the credit card at home instead of in your wallet to avoid impulse purchases.

As with most money matters, frank discussion often leads to understanding and agreement, and
this is one case where parents need to take the initiative in educating their children.

"In our culture, parents are more likely to educate about the dangers of cigarettes and neglect than to warn about the danger of credit cards," says former financial planner Eric Tyson, author of "Personal Finance for Dummies."


Cosigning a Loan - What's the Big Deal?

The world runs on credit. Consumer debt is just under one trillion dollars, and only 7% of Americans do not have a credit card. But what happens when someone has failed to make timely payments and allows their credit history to suffer? Do they stop getting pestered with junk mail? Well, maybe, but many others consider finding someone to cosign a loan.

Cosigning a loan, also known as lending a signature, is a device whereby the credit applicant takes on a co-applicant who promises to repay the debt should the primary applicant fail to make payments. Although this may seem like a nice gesture, it must be treated in a far more serious manner. When someone cosigns for someone else's debt, they become entirely responsible for the repayment of that debt. If the original debtor should lose their job, it is of no matter to the credit card companies, they still want their payments on the first.

It is essential to realize that when someone cosigns for a loan, they are doing far more than vouching for the other person, they are saying they will repay the loan if the other person cannot. The debt will be recorded on the co-applicant's credit history and will affect their credit score. But cosigning can be a monumental help to someone who is trying to get back on their feet. Before you cosign a loan, be sure to take these factors into account:

1. Will you need to take on debt? If you think you might need to apply for a loan sometime in the near future, you might want to think twice about cosigning for someone. Taking on a lot of debt at once is bad for your credit score and can lead to being denied credit.

2. How long have you known the person? Cosigning for your sister is one thing, but putting all of your financial worth on the line for your friend's sister is something else entirely. Don't feel bad saying no to people.

3. Make sure you have a plan in place. If the person cannot make a payment, you want to know about it because it is going to hurt your credit score. Make sure you set up a plan ahead of time, so you are ready to help out with the payments if need be.

Cosigning a loan for someone can be a very tricky proposition. Be sure to think about how comfortable you are with putting your hard earned money in someone else's hands, because that's exactly what you are doing when you cosign for a loan.

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