My favorite scene in the 1985 movie “The Sure Thing” is when John Cusack and Daphne Zuniga are stranded in the middle of nowhere, cold and hungry, and it starts to torrentially pour. Seeking shelter in a locked trailer, John bangs incessantly on the padlock with a stone, while Daphne reaches into her bag looking for lock-picking tools and pulls out … a credit card.
“I have a credit card. I have a credit card,” she says. “Oh. But my dad told me specifically that I can only use it in case of an emergency.” Stopping with the rock raised in his hand, rain pouring off his face, John replies, “Well, maybe one will come up.”
Cut to the two of them having dinner at a beautiful bed and breakfast inn, she eating salmon while he tucks into veal, warm and dry and cozy.
As our daughter gets ready to head to college next month, we are investigating whether she should have a credit card. Her own credit card. Frugal by nature, she says she would like to have a card that offers both credit and debit options, because “I don't want to spend money I don't have.” (I know – the heart sings, doesn't it?)
The pros and cons
There are a couple of reasons we want her to have a credit card as she leaves home. One, for emergencies just like the one in “The Sure Thing.” Well, maybe not just like that one, but yes, for emergencies when a ticket needs to be bought or an ER visit needs to be made. Having a credit card is the easiest way to deal with unplanned transactions that cost more than what you typically have in your wallet.
Two, with a credit card, she can start building that oh-so-important credit history and that strong credit score that will be necessary when college is over and she is buying a car, renting an apartment, buying a house.
There's a third, also — decision-making. Gone are the days when The Husband and I are the Determiners of Her Fate. She is an adult now, and she needs to have responsibility, take responsibility and live responsibly. It's the equivalent of sending her to the doctor and the dentist by herself now – she has to learn to listen to what they tell her and respond appropriately (back from a recent doctor visit: “They said I need to get a shot.” “What shot?” “I'm not sure but they said I need it for college.” “OK, when do you go back to get it?” “I'm not sure.”)
My concern with a debit card is the ever-looming fraud issue. If someone hacks your card, they can drain your account. At least with a credit card there are protections. If we do end up going with the credit/debit card, we will likely create a specific account to tie it to, which has a set amount of money in it, separate from her savings account.
There are two types of cards: secured and unsecured. A secured credit card uses money you place in a security deposit account as collateral. Your credit line is based on your income, ability to pay and the amount of your cash collateral deposit. An unsecured credit card is the typical card that most people have, with a set credit limit, which is not connected to any collateral.
The Credit Card Accountability Responsibility and Disclosure Act of 2009 forbids financial institutions from offering a credit card to anyone under 21 unless he/she can prove the ability to make payments with their own income or they have a willing cosigner. The cosigner, it is important to note, is also on the hook for any unpaid debt.
It's important when shopping for a credit card for your college student to pay attention to the fine print. Many cards targeted to college kids have an annual fee. Others offer incentives to spend, and why encourage overspending? Some, like Discover, offer a ‘good grades' reward, but the downside is lots of places don't take Discover (we have a Discover card because of the cashback program, but we also have a fall-back Visa when Discover isn't accepted).
I asked The Hive on Get Rich Slowly's Facebook page, and they had lots of great advice. Here's some of their thoughts:
Nichelle Fehr Both. She mainly uses her credit card. She is very responsible. She uses a budget that we review together each month. She pays off her credit card every month. It's nice to get the cash back rewards. I don't feel like there is anything inherently wrong with credit cards. They just have to be used responsibly.
Carrie Kissner My 21 year old son who is a Senior in college has debit card only. He took Dave Ramsey's Foundations of Personal Finance in high school. No credit cards for him!
Paul Stephan I only use a credit card, but I pay it off every month. Why pay in cash when I can get a guaranteed 2% discount on everything I was going to buy anyway?
Roxanna Penberg Pifer Credit card with $500 limit. Due to fraud I have taught him to only use his debit card at the ATM. Like me, he pays his cc off every week online instead of waiting for a big amount at the end of the month.
Gena Hersh Connelly Debit card only at 19. He's got to learn to live within his means before getting a credit card. That and having a steady job. Both are works in progress.
Kathy Makowski Both. I had both boys get ATM/credit cards as soon as the bank would let them – 16 years old in high school. Very low limit. That way they would learn how to manage money, pay off before there were any fees, etc. It worked. They are now 21 and 24 and I see they both understand (as much as one can) how not to get into debt. You do have to let them make mistakes like not turning in a book in time which means they get dinged $90….
How about you? What did you decide on for your college student, and how has it worked out? Share your insights and experience with us here or on Facebook!