NEW YORK (MainStreet) — “Neither a borrower nor a lender be,” said the worried father in Hamlet, as his son prepared to go off into the real world. It sounds like good advice, but parents with college-bound children need to adapt this wisdom to modern times.
That fact is, without borrowing one doesn’t build a credit history, making it harder to get a loan when it’s really necessary. Increasingly, good credit is required to rent an apartment and even to get a job.
High school seniors who have been admitted recently to college are starting to get credit card offers in the mail. Though the CARD Act of 2009 curbed some industry abuses — requiring, for instance, that a parent or guardian co-sign for an applicant under 21 — it’s still relatively easy for a teenager to get a card. And, of course, it’s all too easy to abuse one, doing real damage to family finances and wrecking a young person’s credit rating for years.
The obvious remedy: Don’t rely on a credit card. Instead, for most expenses use a debit card that will draw on a checking account. That way, the student cannot spend more than the account holds. There will be no interest charges or late-payment penalties — and no risk of credit damage.
Still, a credit card can be essential if the student gets stranded on the way home for the holidays. And it does pay to start building a credit history as a freshman, so there’s a good, solid record when the young person graduates and needs to borrow for a car or home, get a cell phone contract or win approval from a prospective landlord or employer.
The simplest remedy is to add the student as an authorized user on a parent’s credit card. So long as the parent makes payments on time, the student will share in the good credit history. Or a card can be obtained in the student’s name.
To build a good credit history, the card must be used. Showing you have debt and have paid responsibly does more for your credit than having a credit line that’s never tapped.
This requirement can be satisfied with a low-risk strategy that has some regular expenditures charged to the card, such as magazine or online-service subscriptions that are the same every month. That way there’s less risk of the surprise that comes if the card is used for random expenses such as pizza, gasoline or concert tickets.
For an added layer of safety, the card user can reduce the risk of missed payments by having card balances paid automatically by a monthly transfer from a checking account. Here’s an example from Wells Fargo.
Finally, the student and parents should harness all available electronic aids including online access to the account and alert services that send emails and text messages when monthly payments are due, when large charges are made and when available credit is running low. Many card issuers have smartphone apps for monitoring the user’s various accounts.