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CARD EDUMACATION
From the August 2004 Issue of CardTrak®

Today's college students, growing up in a "less cash society," have more choices than ever when it comes to picking a necessary payment card. Parents also have more options when it comes to matching up the right kind of card with the right kind of kid.

The five student choices and/or parent options include:
1. Parents' Credit Card
2. Personal Unsecured Credit Card
3. Personal Secured Credit Card
4. Personal Debit Card
5. Personal Prepaid Card

Like general credit cards, student payment card selection is based on a personal character assessment of the student.

Not all 18 year-olds are ready for an unsecured credit card on their own. One alternative that works well is a secured credit card since it gives the student some "skin" in the game. They build up a few hundred dollars on their own from a summer job, and then apply for a secured VISA or MasterCard. The deposit guarantees the credit line and may even earn some interest. It has a psychological effect similar to using cash, wherein spending tends to be more frugal. Young secured credit card users tend to buy value-priced items rather than springing for full price. Besides creating a sense of responsibility, a secured credit card generally helps to build a good credit history.

If your kid is good with their money, has a basic knowledge as to how much credit cards cost, and understands the impact of not making timely payments or abusing their credit line, then a card on their own is the best. Otherwise, go with a card with more control.

Building a credit history in college can give a student a leg up in the real world, after graduation. Many employers pull credit files on prospective employees to assess character. Also, a good credit history can mean lower interest rates for car loans and mortgages more quickly after college.

Of course the opposite is true too. A student that bungles up their credit history in college with irresponsible card use can face a frustrating time rebuilding a credit history. Furthermore, slowly paying off high debt, losing a job prospect to someone with a better financial track record, and denials for larger loans such as cars or houses are all serious consequences of credit card abuse.

Here is a rundown of the pros and cons of various student payment card options:

1. Parents' Credit Card

Advantages: management of transactions for all cards; avoids credit damage from late payments and over-limits etc.; favorable pricing due to parent's lower credit risk.
Disadvantages: access to a large credit line unless issuer has the ability to limit access on authorized user; no credit building value for the student.

2. Personal Unsecured Credit Card

Advantages: credit building value; credit limits are usually conservative, average between $500-$1000; may offer special perks for students such as discounts on airline tickets, etc.
Disadvantages: exposure to credit bureau reporting; no parental management; higher interest rates and/or fees; exposure to higher credit limits over time, leading to debt accumulation.

3. Personal Secured Credit Card

Advantages: possible credit building value; lower pricing due to the security deposit, i.e. lower card APR and/or interest earned on the deposit may offset card pricing; limited debt accumulation since credit line is limited to the deposit amount.
Disadvantages: lower credit line, limited to the deposit; exposure to credit bureau reporting; no parental management;

4. Personal Debit Card

Advantages: avoids credit damage from credit card late payments and over-limits etc.; can be set up as joint account with parents to provide easy funding and transaction management; no interest costs; prevents debt accumulation.
Disadvantages: no credit building value for the student; may be difficult to make some transactions such as car rental.

5. Personal Prepaid Card

Advantages: avoids credit damage from credit card late payments and over-limits etc.; parents can fund as needed; no interest costs; prevents debt accumulation.
Disadvantages: no credit building value for the student; may be difficult to make some transactions such as car rental.

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Most of the nation's top ten credit card issuers offer one or more types of unsecured student credit or charge cards. Here is a rundown on the best programs, offered by top issuers nationwide, based on annual net costs. For comparison purposes it is assumed the cardholder is carrying an average daily balance of $500 (for interest cost calculations) and is charging about $100 per month (for reward value calculation, if applicable). Variable interest rates are based on a 4.50% prime rate.
1. $55 - American Express Card for Students
2. $58 - Chase Platinum for Students
3. $59 - Chase Universal Entertainment Student MasterCard
4. $60 - Citi Dividend Platinum Select Card for College Students
5. $66 - Citi Driver's Edge Card for College Students
6. $72 - American Express Blue for Students
7. $72 - AT&T Universal Card for College Students
8. $72 - Citi Platinum Select MasterCard for Students
9. $77 - Bank of America Student VISA Gold
10. $80 - Discover Student Card
Several mid-level issuers also offer student cards at competitive rates, especially if you have some credit history or relationship with the bank. However, most of these issuers do not offer any type of rewards and if they do, it may come with a fee.
Wells Fargo offers the "College VISA" with no annual fee and interest rates ranging from 11.24% to 20.30%. U.S. Bank/Elan offers the "College VISA" card with a $20 annual fee, and rates ranging from 9.99% to 18.99%. BB&T offers the Student VISA Gold Card, with annual fees ranging from $0-$39, and interest rates ranging from 8.40% to 22.40%.
Secured credit cards generally cost more than unsecured credit cards since most carry annual fees. However, some of the extra cost is offset if interest is paid on the deposit. Here is a list of the five best secured credit cards available to students, based on annual costs. For comparison purposes it is assumed the cardholder is carrying an average daily balance of $500 (for interest cost calculations) and made a $500 security deposit (for interest earned calculations). Variable interest rates are based on a 4.50% prime rate.
1. $103 - Bank of America Secured VISA
2. $105 - Wells Fargo Secured VISA
3. $106 - U.S. Bank Secured VISA*
4. $110 - Merrick Bank Secured MasterCard
5. $120 - American Pacific Bank Secured VISA
* average; U.S. Bank offers rates between 9.99% and 18.99%
For information on prepaid cards visit VISA, MasterCard, or the American Express Web sites and review their prepaid, gift, or teen card sections. Bank of America is the largest prepaid issuer in the USA, and also offers the "VISA Buxx" teen card.
With all the card choices available to students there is no reason to leave home without one!

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