Helping Gen Y Get a Handle on Credit Cards

It's not just sex and drugs parents have to worry about when sending their children off to college. It's their credit lines.

Personal bankruptcy is running rampant among members of so-called Generation Y, those from 8 to 23. These young people currently make up the fastest growing segment of the population filing for bankruptcy.

Bankruptcies for those under age 25 have increased 51 percent from 1991 to 1999, according to a recent study from the General Accounting Office, the investigative arm of Congress. The GAO estimates those under age 25 now account for 6.9 percent of all bankruptcies.

One contributing factor in their credit woes is the proliferation of credit cards among college students. According to a 2001 study by college lender Nellie Mae, 92 percent of college students carry a credit card, and 47 percent possess four or more credit cards. They aren't shy about using them either: 22 percent of undergraduates who have credit cards maintain balances between $3,000 and $7,000.

Before your child gets to campus, it is very important to make sure he or she is educated about the potential perils of credit cards, especially since plastic is the most efficient, convenient and safest way to make purchases.

Here's an example that illustrates why it is so important that students do not rack up debt early on.

Mellody's Math: If a student has $5,000 in credit card debt after college, and the interest rate on the card is 18 percent, it would take 26 years to pay off the card if they simply make minimum payments. In fact, you would pay $7,115.42 in interest during that time. Theoretically, that student's own children could be college graduates before the last payment is made.

Credit Still Efficient for Students

Despite the possible debt trap, credit cards remain the most efficient, convenient and safest way to make purchases.

With so many credit cards on campus, and consumer debt at an all-time high, parents and students should approach the credit card roulette table with caution and awareness. There are a couple of new products on the market which are excellent ways to educate children about credit and are reminiscent of the training wheels you put on your young child's bike when he or she was learning how to ride.

Recently, a new breed of credit card has come onto the scene directed toward the 14- to 17- year-old market. In the past five years, this market has grown significantly to $172 billion a year, from $122 billion.

Here are my picks for the best student plastics.

Campus Bookstore vs. Campus Pub

One alternative to a traditional credit card is the Visa Buxx card, which is similar to teaching your kids to swim in the shallow end of the pool instead of the deep end.

The Buxx card works like a reusable, prepaid calling card, drawing money from an account exclusively set-up for purchasing. Similar to a debit card, the cost of the purchase is withdrawn from the account once your child makes a purchase. After the card is activated, parents can add or subtract from the balance over the telephone or Internet every other week, or once a month. Individual banking institutions determine the annual or one-time enrollment fees for the Buxx card. However, a monthly charge of $2 is universal if no activity occurs for a month.

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