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By Herb Weisbaum ConsumerMan
msnbc.com contributor
updated 8/25/2010 4:51:37 PM ET 2010-08-25T20:51:37

It’s the last-minute rush before the start of the fall semester. Many parents help their college-bound children buy supplies and new clothes.

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But what will you say if your son or daughter asks you to be a co-signer, so they can get a credit card? Would you put your credit on the line for that?

College students have always been a prime target for credit card companies. Get them early, the logic goes, and you have a customer for life. So banks gave cards to students who had no way to pay the bills. Not anymore.

Congress heard the horror stories of students who’d run up tens of thousands of dollars in credit card debt before graduation and decided to put an end to this credit card free-for-all. The Credit CARD Act of 2009 (which took effect in February) requires anyone under the age of 21 to prove they can make the minimum monthly payments – through wages or savings – or have a co-signer.

This will make it harder for those under 21 to get credit cards. Bruce McClary with ClearPoint Financial Solutions, a national non-profit credit counseling agency, thinks that’s good. He says their credit counselors see too many young people who get carried away and default on their first credit card.

“It’s heartbreaking to see,” McClary says. “If you slip up right out of the gate, you’ve pretty much trashed the first 7 to 10 years of your credit history.”

Should you agree to co-sign?
This is a huge decision for parents. You need to carefully consider the risk you’d be taking and the possible consequences.

“When you co-sign, you become 100 percent responsible for that account,” explains Gerri Detweiler, personal finance advisor for credit.com. She tells parents not to co-sign for their children’s credit cards. 

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“As far as credit reports are concerned, both the primary borrower and the co-signer each benefit or get hurt by anything that happens to the account,” Detweiler explains. “So if your child trips up, your credit history could be affected.”

This will ding your credit score which could result in higher interest rates for new balances on your credit card.

Bruce McClary tells parents they should not feel pressured into co-signing. He says you need to consider the risks and decide if your child is ready to handle the responsibility of having a credit card.

“If a son or daughter is not prepared, then parents should back away and do the best they can to explain to their child the ways they can establish credit on their own,” he says.

And remember this: You are on the hookfor that co-signed account until it is paid off and closed.

“So if you decide to co-sign, use it as training wheels,” Detweiler advises. “Let your child get a credit history established, then make sure you close the account.”

You’d be smart to choose a card with a low limit. Consider a student credit card. These cards typically have a credit limit of $1,000 or less and no annual fee. Some offer no interest on balances for the first 6 or 7 months.

“It’s a good starter card,” says Nichole Mustard, a vice president with the website Credit Karma. “The lower limit lets them get used to charging things and getting those bills paid on a monthly basis.”

Something else to do if you co-sign:  have the statement sent to your home address or check the account online regularly. This will let you see if your child is making late payments or running up a big balance.That’s important, because this could spell trouble for both of you.

Options that do not involve co-signing
You can give you child a pre-paid credit card or a debit card linked to a checking account. Some credit counselors believe going this route is best for students. But this won’t help them build a credit history, something they’ll need when they want to buy a car or rent an apartment.

A secured card does let the student establish a credit history. The spending limit is based on a deposit with the bank. Usually, there’s a minimum deposit of $300 to $500 required. If they can’t pay the bill, the bank uses that collateral. Secured cards are relatively easy to get. But check the fees. They can be high.

You could also make a son or daughter an authorized user on your credit card account. Since you get the bills, you can see how much they’re spending and what they’re buying. Because they have a real credit card, they are creating a credit history.

Stephen and Cheryl Wiley of Glen Allen, Va., decided to go this route with their two daughters, Kelly, 20, and Katherine, 18.  The Wileys did not want the girls to have their own credit cards. But they wanted Kelly and Katherine to have a way to pay in an emergency and start establishing credit. The authorized user cards do both of those things.

“I want to make sure they use the cards wisely,” Cheryl says. “That’s where my job comes in to teach them how to manage their finances.”

The girls know the rules. The cards are for emergency purchases only. Any charges must be paid off by the due date. If not, their name will be taken off the account.

The Wileys say there’s a reason they’re so strict. Back in 1990, they had to file for bankruptcy protection because of medical bills. They know how a bad credit report can hurt you and they don’t want that to happen to their daughters.

The bottom line
Talk to your children about money and being financially responsible. Do it when they’re young, not when they’re headed off to college. Financial experts say you should discuss the family’s finances in front of the kids.

“A lot of children learn through absorbing what they hear their parents do, the tradeoffs and decisions they make,” Credit Karma’s Mustard says. “A lot of it starts at the dinner table or living room.”

This many not be easy, especially if you’ve had financial problems.  But if you have those conversations with your kids they will learn about the pitfalls and the successes of your decisions. It’s a great opportunity for you to educate them by using your experience as an example.

© 2013 msnbc.com.  Reprints

Video: Money 101 for college-bound kids

  1. Closed captioning of: Money 101 for college-bound kids

    >>> series, back to school today, credit card smart. how teenagers can deal with finances before they head off to school. carmen, good morning. this is the first year where college students cannot get a credit card without proof of a job or having a parent or guardian to cosign. the idea was so they wouldn't amass a lot of debt.

    >> right.

    >> but it can be a bad thing for them.

    >> i am of two minds here. yes, credit card companies went too crazy marketing college kids , extended too much credit , but enabling parents to continue to be shackled to their adult grown children until they are 25-plus, i have heard from too many 25-year-olds with full-time jobs not able to get one credit card because they couldn't establish their own credit in college. this is what's going to happen. this is the future.

    >> they get out of college and want an apartment, a car, a loan, whatever.

    >> and the parents have to continue to cosign. this is a bit drastic, so you have to take measures, plan it out better.

    >> let's talk about options out there. first of all, it's a secured card, what is that?

    >> think of it as training wheels on a credit card . you put cash money on the card. you have to prove income. if you have a work study or part-time job this could be the card for you. you build off that money, your cash is on the card. they will extend you credit eventually. you want to make sure they report to the credit reporting agencies to build your credit .

    >> also, you say you can cosign as a parent on a new card with your child.

    >> yeah. i'm never a fan of cosigning. it's like codependency. but if you cosign on a new card you're both equally responsible for the balance and also for your credit report . but because your college student doesn't have credit history you will get a low limit. this limits the damage to your credit report and score and your wallet if you get footed with the bill. it's good to do that. once you graduate you have to be in it together in terms of closing the card. that's something you want to do to cut the apron strings.

    >> if the kid is responsible you have to go to them saying i want to close this but i want your permission which is weird.

    >> it is strange. the limit is low so it limits the damage to you and your credit score .

    >> you can authorize your son or daughter to use your card, an existing card. that sounds dangerous. we did it.

    >> you did that.

    >> i'm not sure it was the smartest thing.

    >> times have changed. because they don't have access to credit . the problem with authorized users is it doesn't build up your credit score . if you have a student who's not very responsible handing them plastic isn't very responsible. they know you get the bill. and you have a big credit limit . the damage to your credit score and cash could be substantial. be careful.

    >> how about forgetting the credit card and going for a debit card ?

    >> here's the thing. that could be a good situation if you have -- talking about limits. in college you're learning about limits to your money. make sure if you get a debit card that it doesn't have overdraft protection . there is nothing like going to the register and being denied to teach you something. also, too, it's not going to build credit . i want you to build your credit before the age of 25. try to handle both a debit and credit card.

    >> if you had to pick one, what's your advice?

    >> go with the secured card or cosign and a debit card with a limit in term of cash finances there. be careful about budgeting. remember, not just books but meals. is it cafeteria, pizza budget, transportation. there are a lot of expenses that can creep up, especially if your kid is a freshman and not prepared for it. budget now.

    >> keep the money conversation going with kids.

    >> it's an important thing. i tell you, when the bills come, you're tempted to pick up the phone and yell and be stressed out. don't have the conversation once a month. have it continuously when you talk during the week. how's the pizza budget? is there anything going over budget or under? let's adjust a little bit. how is the credit card going? keep talking so don't do it when they owe you something because they will be hiding things.

    >> and understand they will make mistakes.

    >> we all go on pizza benders.

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