Before You Give Your College Kid a Credit Card - Read This

Credit cards are complicated, and there are no easy answers. The bottom line is your child will be borrowing money to pay their expenses. It’s normal to feel a little intimidated and stressed about that. But it’s part of life and it’s been done by many before. We’ve compiled some tips and tricks to help you and your college student make an informed decision that’s right for both of you.
 

Reasons to Get a Credit Card

We 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 Pitfalls

Building 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 Cost

How 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.

Even at a below-average interest rate, it will take nearly two years to pay off the balance. And over time, that $1000 purchase will wind up actually costing you $1157.95. That extra $157 is a decent chunk of change to most college students. Imagine the compounding effect if they make multiple purchases and max out their card. Yikes!

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.

2. Secured Credit Cards: Secured cards work more like traditional cards. They require a deposit to secure the line of credit, and often that line of credit will not exceed the amount of the deposit.

• 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.

3. Unsecured Credit Cards: Unsecured cards are essentially a perpetual line of credit that can be used and paid off repeatedly, so long as the account is in good standing.

• 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 Habits

There 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.

Set specific limits. Another way to curb large impulse buys is to set spending limits, either per month or as a total of the card’s limit. Keeping the payments affordable, and the credit well below the limit, helps to keep their credit score in good shape.  
 

Setting them up for success

The biggest lesson is that credit cards are not an easy, catch-all solution for accessing extra cash. It takes far longer to raise a credit score than it does to sink it. Choosing the right card and employing the right habits will go a long way toward setting up your college kid for a bright financial future.