In response to the newly passed Credit CARD Act of 2009, CreditCards.com has released a report with substitutes for parents who seek to provide their children with some sort of payment options.
There are five options to choose from, depending on a parent’s given situation, and parents can even mix and match if they so please.
1. Authorized user credit cards with credit limits
Some cards will allow you to add an authorized user and set a lower balance limit for that user. Before proceeding with this method check with your card issuer to see what, if any, fees are associated with taking this path.
Pros: It’s your account, so you know if the bills are paid. You can view all charges place on the card. Students can still build credit.
Cons: You’re legally liable for all charges. If bills are unpaid, you could hurt you and your kid’s credit score.
2. Debit cards
The debit card is basically a plastic checkbook. But if your kid can’t balance a check book, the debit card can be troublesome. Don’t opt in to overdraft protection and the card just stops working around $0.
Pros: Easy to get and accepted pretty much everywhere. If you open a joint account you can monitor your child’s spending and deposit extra money as needed.
Cons: Your kid can only spend what’s there, so emergencies will require a quick deposit. Debit cards don’t build a credit rating.
3. Secured cards
You give the card company a deposit equal to the amount of the credit limit, which it holds as security for the life of the card. Other than that, a secured card works like a regular credit card.
Pros: All the security and protections of a credit card. Credit is in your child’s name. Some cards may convert to non-secured credit cards after a period of a year or two of good behavior.
Cons: Tend to be a little more expensive, and for a lower amount. Higher interest rates. Lower balance limits. Students still need to show that they have sufficient income or assets cover charges, even with a deposit. Unpaid bill leads to poor credit, which is worse the no credit at all.
4. Reloadable pre-paid cards
Reloadable pre-paid cards are basically a hybrid of a debit card and credit card. You or your student loads it with cash as often as you want, often through a credit card, debit card or bank account transfer.
Pros: Don’t require a credit check. Widely accepted. With some cards, you can monitor or limit your student’s spending. Some cards offer $0 liability if the card is lost or stolen. If the student mishandles the card, it won’t affect anyone’s credit score.
Cons: Your student is limited to the amount loaded onto the card – has to track spending and balances, and isn’t building a credit history. There may be fees, and you need to understand the fee structure. There may be minimums or maximums requirements for adding money, or limits for taking cash from ATMs. There may be a lag time between when money is transferred to the card and when it is available to spend.
5. Gift cards
You can buy credit card-branded, fixed-amount gift cards almost anywhere, for amounts that often range from $25 on up to several hundred dollars. They spend like a credit or debit card, and can often be used anywhere the regular credit card is accepted.
Pros: Cards are good for five years, unless stated otherwise. Don’t require a credit check or bank account. Not linked to a bank account, thus safer for online purchases – especially for students who put these numbers into a communal computer.
Cons: Fee structure and expiration date. No loss or theft protection. Don’t build a credit history. Some merchants, regardless of the brand may refuse gift cards. They can’t be used at an ATM.
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