Parents, did your child learn everything they need to know about responsible credit card ownership in high school? Not likely. While it would be great if they graduated with a solid foundation in personal finance, the responsibility of teaching them good credit card habits probably falls on you.
Reasons to Get a Credit CardWe go to college for the knowledge, experiences, and opportunities. Financial skills, including managing a credit card and learning how to use it wisely, can bring a number of benefits to young adults:
- Credit cards help young adults build a credit history. Building an initial base of good credit is necessary when your child is ready to rent an apartment, or purchase big-ticket item like a vehicle or a home.
- They can really help in an emergency. If an emergency situation comes up and the cost is beyond the money in their bank account, having an extra line of credit available gives them, and you, some peace of mind.
- Learning financial literacy. Along with checking and savings accounts, credit cards can provide valuable lessons in budgeting, interest rates and penalties.
Avoiding Traps and PitfallsBuilding a foundation of credit history is important. But we all know that when used incorrectly, a credit card can also seriously damage your credit rating and prevent you from renting an apartment, buying a car or home, and in some cases, even landing a job. Here are some fundamental practices to help you avoid the problems associated with careless credit card use:
- Remember, it’s not your money. When you use a credit card, you are borrowing money to buy something, with the assurance that you will pay it back. Think of it as a loan (with sky-high interest rates).
- Do not miss payments. Missing a payment will quickly add late fees, and possibly other charges, to the total bill. Even missing a single payment can put a huge dent in in your credit score.
- Look for traps. Beware of introductory interest rates and high annual fees. You may get the card at a lower rate, but that won’t great deal won’t last forever. Also, watch for high annual fees. Card with fees often have nice perks, but those perks may not be useful to a college student. Weigh the perks against the accompanying fees and make sure you understand what you are paying for.
- Don’t get multiple cards. Owning and managing multiple cards will often negatively affect your credit score. Use a single card sensibly and you’ll build a healthier score.
- Keep your balance low. Another way to adversely affect your credit score is to consistently max out your card. Keep the balance around 30% of your limit. (Need to find a link to back this up).
Learning the True CostHow do you teach your college student the basics of interest? Here’s a quick exercise you can do as an intro to the true costs of credit card purchase. Imagine you bought a big-ticket item for $1000 and plan to pay it off slowly making only the minimum payments.
Visit our free financial tools page at StarionBank.com and click on “How Long Will It Take to Pay Off My Credit Card.”
- Enter $1,000 for the current balance
- $50 for the monthly payment
- 15% for the interest rate
- Click the check box that says, “Show Payment Schedule,”
- Click Compute.
If the big-ticket item is a planned purchase, and is not time-sensitive, encourage them to save up for it. Not only will they pay less, but they’ll also earn interest on their savings while waiting to click that “buy now” button.
What kind of credit card is best for students?If your child is college bound, but still under 18, they can’t have a card of their own yet. Giving them access to this kind of credit card requires that you make them an authorized user on your card. The upside is they benefit from your credit history (assuming your credit is good), and there is lower risk to their long-term credit history.
But it also gives them access to your money, which can be dicey if they haven’t yet learned to spend responsibly.
If your child is 18 or older, you have more options:
1. Student Credit Cards: To qualify for a student card, the student must be enrolled either part time or full time at a school. They may also need to prove income and have a cosigner (you) on the card application.
- Pros: Some cards offer student rewards such as cash back at campus bookstores or added credit bonuses for a good GPA.
- Cons: These cards tend to have higher interest rates and fees, and a lower spending limit.
- Pros: May offer a lower interest rate than student cards. The limited amount of credit can limit the amount of debt a student can rack up.
- Cons: Lower spending limit, which may be a hurdle in emergencies.
- Pros: This may provide a higher credit limit for emergency use.
- Cons: This may not be an option for every student because some unsecured cards require a previous credit history.
Build Good HabitsThere are a few steps you and your child can do to prepare for that first credit card and build good financial habits. We’ll call it homework, to help your kid as they prepare for school.
- Checking and savings first. If your child does not yet have a checking and savings account, sign up for one at starionbank.com. This is the first step to building a base of habits that includes budgeting and automatic transfers to savings.
- Pick one thing. Have them choose one thing to put on their credit card each month, and then help make sure they pay it off in full. This gets them used to using the card but only doing so within the limits of their budget. Good examples to start with are gasoline and/or groceries.