New legislation means more "required reading" for creditors Photo by: Piotr Lewandowski (Stock Exchange)

It’s common wisdom – and it even happens to be true – that the longer your credit history, the better. The age of your revolving accounts, both individually and on average, is a major factor in determining your credit score.

Until recently, it was easy to “get in the game” of credit right out of high school, almost as soon as you hit 18. But many credit offers extended to college students have been rife with predatory practices and implicit in long-term debt burdens.

With this in mind, recent legislation aimed at protecting credit consumers has drastically altered the credit landscape for young people.

What’s Changed in Credit Cards for Young People?

In a word: everything. Consumers are now barred from opening a credit card account until age 21, unless they can provide evidence of financial solvency or get a responsible adult to co-sign. This means that the students most likely to start early on their credit history are those with part-time employment; for others, the question of obtaining a co-signer can open up a sticky financial mess for both child and parent.

As with life-changing transactions like mortgages, co-signing on a credit card for a student indelibly links the co-signer and principal of the credit card. In the event the young person cannot pay their credit card for whatever reason, the co-signer is financially and legally responsible for the outstanding balance. This can negatively impact the credit report of the co-signer as seriously as a default on a personal account.

As of now, there is no way to “break the link” between the two parties for a co-signed credit card; both should consider carefully whether applying for a given account is the right move, by reviewing the terms and conditions and coordinating on any major purchases. If an account is diligently maintained until age 21, it might be a good option to apply independently for new credit around that time, and eventually retire the older account – however, this will penalize the young person’s credit rating to some degree.

What Other Credit Options Are There?

Some students who hold a part-time job may remain eligible for credit in their own right even under new regulations. In some cases, this may include students whose income is derived from on-campus employment, including “work-study” financial aid. Likewise, parents can choose to help their kids become more credit savvy by making them authorized users of existing credit accounts. Unlike a joint credit card in the student’s name, this gives the responsible adult full control over the account. In joint accounts, though the co-signer may receive a monthly statement, all decisions are made jointly.

Ultimately, though new regulations make it more difficult to become established, they’ll also help regulators clamp down on unfair practices aimed at victimizing inexperienced consumers. In the long run, the regulatory situation makes credit a decision that requires dependent students to consult their parents, even if they’re away from home – while independent students who are financially sound will still be able to choose on their own. Instead of looking at it as a burden or unfair intrusion, consider it a chance to teach a few more lessons about financial responsibility in the face of real world challenges.

Photo by: Sanja Gjenero (Stock Exchange)

In today’s tight consumer credit market, it’s harder than ever for someone starting out on the road to financial responsibility to establish strong credit; and even with new legislation intended to protect credit-holders, the stakes may very well be higher now than they were twenty, ten, or even five years ago. A few key credit facts can go a long way toward helping teens and young adults establish a positive credit history that works in their favor when it’s time to start making big decisions.

Here are some useful credit tips to help the youngster in your life avoid debt as an adult.

1) You Don’t Have to Use Credit Cards to Start a Credit History

To get credit, you have to have a credit history. This might seem like a baffling contradiction at first, but remember that keeping current accounts other than credit cards can also start the ball rolling on documenting your responsible financial behavior.

Credit cards offered to students and others with weak or nonexistent credit history are often fraught with hidden perils and predatory terms that might activate unexpectedly. Collaborating with responsible adults to put another account in a teen’s name, such as a secondary telephone, builds credit and good budgeting habits at the same time.

2) Student Debt is a Different Animal From Credit Card Debt

Student debt is the “other” major category of debt that’s most likely to influence a young person’s life. If student debt climbs out of control, it can’t be eliminated by bankruptcy, and may make debt consolidation more complex, as — from year to year and semester-to-semester — it may come from multiple creditors. Student debt can easily grow beyond expectations, as payments do not occur until after graduation, but interest continues to accrue as balances mount “behind the scenes.”

Be exceptionally wary of private student loans, and double-check all information from a university’s financial aid office; a few of these have been implicated in collusion with private lenders who advertise on campus. The old age “trust, but verify” applies here. A student should never sign a promissory note without the input of a responsible adult, and preferably not without consulting an independent financial advisor first. Neglecting this step (tempting when “everyone has student debt”!) can have decades-long consequences!

3) Getting a New Credit Line is a Double-Edged Sword

Opening a new credit line temporarily reduces your credit score, but when managed effectively, larger, value-added credit lines open greater opportunities and establish more trust. No matter the size of your overall credit holdings, you should strive to use only a fraction: the ratio of your total credit line to your current balance is one of the most heavily-weighted factors in your credit score. This leads directly to the next point:

4) You Don’t Have to Use Credit Cards to Grow Credit, Either

Once you have an established credit line, you do not need to actively use it to maintain a credit score. Most creditors will eventually close a line of credit that goes unused for a prolonged period of time (a year or more) but any transaction, no matter how minor, will keep the account alive; and, if paid off right away, it can only count in your favor.

Often, credit lines will grow without much use; but you should always be aware of this, and be aware you can refuse credit line increases and revert to your previous limit if you wish. If creditors make changes to your account you are not comfortable with, those with negligible balance have added clout for negotiating, refusing, or just going elsewhere.

The credit landscape is evolving along with the legislation that impacts it; but the basic facts about credit cards remain the same. Used responsibly, consumer credit can be part of an enriching financial strategy, and it’s never too early to start setting good habits.

Piggy BankPhoto by: Marcelo Moura (Stock Exchange)

Piggy Bank #1: The Three Little Piggy Banks

Piggy Bank is a UWSA blog series discussing ways to save small amounts on a regular basis and how the savings add up surprisingly quickly. Please feel free to share your ideas and your stories about how saving “pocket change” added up and helped you and your family reach a meaningful financial goal.

In the grocery store check-out line the other day, I watched a mom struggling to say “no” to her two sons who were begging her to buy them each a little car that the store had strategically placed at their eye level. There were a whole bunch of toys and trinkets there – meant to encourage impulse purchasing in kids – and in parents who instantly decide that a couple of extra bucks is an easy way to make their child happy. Parents beware! These are NOT cheap toys; impulse purchases add up to big bucks very quickly, especially for parents on a budget. Worse, they encourage terrible spending habits in children from the very earliest of ages. We want to teach our kids how to save, not just spend.

The approach I took with my son, who’s two, is the “three piggy banks” system.” The idea is simple and you can make your “three little pigs” system easier or more complex, depending on your child’s age.

The first step is to get three piggy banks for each child. You can purchase inexpensive ones or make your own out of jars or plastic containers. Perhaps you want to let your child pick out the piggy banks or do a craft with them to turn used containers into piggies.

Next, label the piggy banks as follows: “Savings,” “Spending,” and “Sharing.”

The “Savings” piggy bank is for collecting money that your child will keep on adding to over time. One idea is to have the child periodically deposit the money from the “Savings” piggy bank into their very own passbook savings account. This lets them get used to going to the bank and watching the total in their account go up and up — and they’ll see how their money earns interest.

The “Spending” piggy bank is to help your child save for a long-term goal. This depends on age, but with prices nowadays, it’s probably not hard to imagine that even a younger child wants something that will require accumulating enough money. If they choose to purchase something else with this money, like an impulse toy, it means you have a chance to remind them of their other goal and that it will take longer for them to get “the big thing” they’re saving for. This helps children begin to understand the concept of “cost” as opposed to “price.” Their decisions will have real consequences for them – positive and negative. To reach the long-term goal, they will learn to be more patient and not give in to impulse buying and other diversions.

The “Sharing” piggy bank is for donations to a charity that is important to the child or to your family. The satisfaction of helping those in need it is a wonderful feeling to experience at any age. Charitable giving is as American as apple pie. We have the highest level of individual donations in the world year after year after year.

Once the piggy banks are set up, whenever your child receives money, whether it’s allowance, a birthday gift, payment for shoveling the neighbor’s driveway etc., it gets divided evenly among the three piggy banks.

The three piggy banks can teach children to see money in many ways, not just in terms of what it can buy them. They also see that money can grow into more money and that it can help them help other people. It’s never too soon to start.

The three piggy banks is also a way to encourage your child to spend from the “Spending” piggy bank, rather than your wallet. It might not stop a child from asking you to buy them a trinket they spot at the check out counter, but it will give them an understanding of why you say “no” and a true sense of appreciation on the rare occasion that you say “yes.”

Got a great story about saving money? Please share your inspiration! Write to me at: staff@uwsa.com