Published by Faron Daugs
So your college bound son or daughter is being bombarded with solicitations from credit card companies offering a myriad of incentives. Should you encourage them to obtain a credit card so they can start building their credit history?
This is a common concern for parents who have children leaving home for college. There is no denying the fact that charge cards and digital wallets (Apple Pay, Google Pay, etc…) have become the preferred method of payment in stores and online. The advertising world has even put out commercials almost demonizing customers who use cash instead of plastic (or digital wallet) to make a purchase.
You may have big concerns about sending them off on their own with a “credit card” but the best form of defense is a good offense. As parents, we need to be involved in how our children venture into the world of credit, identifying both sides of the story.
Advantages …
- A good credit score is important for financing big-ticket items like houses, cars or even businesses.
- Can be safer and easier than cash.
- Better tracking of spending habits.
- Helpful for emergencies.
- Purchase protection or rewards programs may be attractive, if used correctly.
Disadvantages …
- Poor credit management can lead to a bad credit score that can take years to repair and prevent one’s ability to move forward with other phases of financial life.
- Tricky fees and interest rate schedules can be costly and confusing.
- Time! It takes time to educate your child about the ins and outs of credit cards. If you don’t feel you have the tools to do this, seek the help of a friend, relative or professional.
- The perception of “free money” may prompt your child to spend more, resulting in unwanted consequences.
How can parents help college-bound children muddle through this world of credit?
If you don’t already have applications coming in via mail and email, there will be ample opportunity once your child gets to college. Banks and card companies set up kiosks around campus offering all sorts of incentives – and maybe a cool tote bag to boot!
Have your student collect three or four brochures or search online via sites like www.nerdwallet.com or www.comparecards.com. Sit down with them and review the following:
- Finance charges: This is the interest rate charged on unpaid balances and can be as high as 25 percent.
- Annual fees: Is there a membership fee or annual charge just to have the card?
- Late payment: How does the company charge if they don’t receive payment in time? These fees can be very costly and are over and above the finance charge.
- Cash advance: These fees and interest rates are very high and are handled differently than those on purchases. Avoid cash advances at all costs!
- Credit limits: How much credit are they making available to your student?
Try to find the card that has the lowest interest rates, low or no annual and late fees, and a fairly small line of credit (at least to start). Watch out for teaser rates that start out low and then adjust – usually sky-high – after a certain period of time. I would stay away from cards that work as both debit and credit as they are generally tied directly to a bank account.
Once they have applied…
- Go through the expenses you expect your child to cover while at school.
- Use the credit card only for an amount they are certain they will be able to pay in full when the bill comes.
- Determine the closing date and statement due date. Impress upon them how important it is to make the payment right away to avoid late fees and finance charges.
- Ideally, have them sign up for online access and give you access as well. You can review the statement once a week to avoid surprises! In time you may be able to reduce your involvement.
- If there is an emergency (spring break trips do not qualify) help your child work out a payment plan to eliminate that debt. They will see how long it takes to do this and will think twice about maintaining a balance on the card in the future.
Maintaining good credit and understanding how it works is a great lesson for your student. It is an important tool in helping them successfully manage their own finances, now and in the future.
