3. Use credit cards cautiously. Before federal credit-card reform went into effect in 2010, credit-card companies solicited students on campus to open accounts, offering T-shirts and other gifts to entice them. The law now requires students to have either proof of income or a co-signer before they can open a credit-card account. If you co-sign for your child’s credit card, you’ll be responsible for paying the balance if he fails to do so. Another option is to add your child as an authorized user on one of your accounts. Under the Fair Credit Reporting Act, being an authorized user of a credit card will still allow her to build her own credit history.
Some credit-card issuers offer student cards, which generally carry a low credit limit. You can search for these cards on credit-card comparison sites such as CardRatings.com and LowCards.com.
Before you put plastic in your child’s hands, make sure she understands how a credit card works. LowCards.com advises that you show your child your own credit-card bill to explain finance charges, grace periods, and minimum payments. A good teaching tool is the “minimum payment warning” that credit-card issuers are required to place on bills. It shows how long it would take to retire your debt and the total amount of interest you’d pay if you made only the minimum payment each month. Instruct your child to charge no more than he or she could afford to pay in a month, and to avoid carrying a balance.
The tendency to overspend when using credit cards makes them best suited for emergency purposes. As with a bank account, you can set up online features and alerts to make sure your child keeps his or her spending in check.
4. Be careful with student-aid debit cards. A June 2012 study by the U.S. Public Interest Research Group found some 900 agreements between colleges and banks to electronically disperse financial aid and grant money on debit cards that often double as student IDs. Some of these cards carry hefty overdraft fees, reload charges, and fees for using debit cards with a PIN instead of signing for purchases. Some programs have limited ATM access, causing students to use outside ATMs, thereby racking up fees.
If the program offered by your child's school is laden with fees, or the ATM locations are inconvenient, she should ask to have the student aid electronically deposited into a checking account not affiliated with the school, or to have a check mailed.
5. Check for fees on prepaid cards. Reloadable prepaid cards, which work like debit cards but are not part of a checking account, are attractive to people who don’t have a bank account or who spend too much using credit cards. Prepaid cards usually bear familiar logos such as Visa, MasterCard, or Discover, and they can generally be used to make purchases in stores and online, receive direct deposits, pay bills online, and obtain cash at an ATM. Some, such as the UPside Visa and American Express Pass, are marketed to students and their parents as a way to help young people learn to manage money.
A 2013 Consumer Reports analysis of prepaid cards found that they can be loaded with fees, only a few of which might be disclosed at the point of sale. Prepaid cards can have monthly maintenance fees, reload fees, and inactivity fees. Moreover, they lack the guaranteed protections we take for granted with debit and credit cards, including what happens if the card is lost, stolen, or used for unauthorized transactions, or if the bank behind it fails. The good news: The better prepaid cards no longer have these fees, overall prepaid card fees have fallen, and features have improved.
Recently, some mostly fee-free cards have popped up on the market, though they typically require money to be added via direct deposit or from a bank account to avoid fees. Bluebird or Green Dot prepaid cards are such low-fee and high-feature cards, notes Christina Tetreault, a staff attorney at Consumers Union who wrote the prepaid-card report.
"The Green Dot card has an edge for college students because you can pick either Visa or MasterCard branded cards," she said. "For parents who want to keep close tabs on their kids, Bluebird allows for the creation of sub-accounts. That means parents can open an account and give their kid a Bluebird prepaid card linked to a sub-account, allowing the parent to monitor the sub-account (the kid's account), transfer funds, and otherwise keep an eye on the financial habits of the student."