Time is running out for college students to get their own credit card. Starting in February 2010, those under 21 will no longer be able to get a credit card unless they can prove they have the means to prepay the debt or—gasp!–a parent co-signs.
The new law is meant to make it tougher for young people to get credit. According to Credit Karma, a company which provides free credit scores, and tools to help consumers better understand how credit scores and credit reports work, the average college student graduates with more $3,100 in credit card debt.
But is limiting their access to credit really a good idea?
Ken Lin, CEO of Credit Karma says waiting until 21 to get a credit card could have long term implications on a person’s credit score. “Generally, credit cards are the backbone of most consumers’ credit history,” he reports. “By curbing credit card access to young consumers, a larger portion of the population may find themselves with limited credit history also known as ‘thin file.’ Consumers with thin files may find it more difficult to apply for credit since they may not have a credit score.”
Lin does believe there is an upside to waiting; “Young consumers are less likely to get into early financial trouble, particularly if they don’t have the means or income to support a credit card.”
What impact will co-signing have on a parent’s credit score?
In general, co-signing a credit card is not a good idea. Unless parents have diligently about taught their teenaged children about the importance of managing credit, and have themselves never missed a payment (and modeled this behavior), it is unreasonable to expect an inexperienced person to handle a credit card responsibly. Unfortunately, most teens learn about credit the hard way.
For parents, this legislation could be a double-edged sword. “While it could protect their children by limiting potentially expensive debts, the law could also create a liability for parents,” explains Lin. “Co-signing means that parents will be vouching for their child and thus any default on that card will be reflected in the parent’s credit score. Parents should not take this responsibly lightly.”
Let’s also keep in mind that new legislation does not come swiftly or easily. This new law reflects the unfathomably huge unpaid debt already acquired by teens. It is to protect the credit card companies from misuse of credit, plainly. “By requiring a co-signer, we can get parents involved in monitoring spending behavior early, before debt gets out of control,” says Lin. But how many good-intentioned parents are still bailing out their children’s poor judgment with money management?
Read the rest of this article, and learn the three potential pitfalls of the new legislation.