You might want to shelter your college kids from the complicated world of credit (and potential debt) for as long as possible, but at some point they will need to learn the ropes
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As a parent, your instinct might be to shelter your young adults from the complicated world of credit (and its potential debt downside) as long as possible. But at some point, they will need to learn the ropes if they ever hope to buy a car, rent an apartment or own a home.
The key for new card users is to learn how to wield plastic responsibly and build a strong foundation for their financial future.
“Students who use credit responsibly while attending college will be most likely to have a much easier time managing student loan payments and other financial obligations after graduation,” says Bruce McClary, vice president of communications for the National Foundation for Credit Counseling.
That’s why parents need to help develop their child’s financial maturity by introducing them to credit sometime during the college years.
“With proper guidance and the right sort of planning and budgeting, opening that first credit card can be useful for young people to spend and budget responsibility,” says Matt Freeman, head of credit card products at Navy Federal Credit Union.
One thing to note is that the Credit CARD Act of 2009 prohibits people under 21 from having their own credit card unless they earn income, have a co-signer on the card (usually Mom or Dad) or are an authorized user on a parent’s card.
Signs your college kid is not ready for credit
Not every college student will be ready to manage a credit card on their own right away. Warning signs may include irresponsible spending in the past, blowing through allowances or paychecks immediately or constantly asking for more money because they didn’t properly budget.
Here are four signs your college-age kids just aren’t ready for credit:
- They don’t have a checking account.
Has your teen successfully managed a checking account and debit card? Qualifying for and responsibly handling a credit card probably won’t happen until that milestone has been conquered.
- They haven’t paid at least one bill consistently.
“If your child has never paid a bill before, or if they are consistently overdue, they may end up abusing the privilege of credit,” says Grosz.
- They’ve never had a job.
There is something to be said for appreciating the value of a hard-earned dollar. Students who’ve never worked to save up for something are more likely to engage in carefree spending.
- They don’t know how to save.
“A cornerstone of being financially responsible is being able to put money into a savings account,” says Freeman. The added benefit of saving is that there will be funds available so they don’t have to resort to plastic all the time.
If your teen does not work, keep in mind that going the co-signer or authorized user route will put your credit on the hook for any debt that goes unpaid. If you add your child as an authorized user on one of your cards, you can closely supervise his or her spending. This could be a good practice step since you retain control of the account, and you can choose to remove the authorized user at any time.
Here are some reasons why college could be the perfect time for your child to give credit cards a try.
1. Building credit early has its advantages.
Landlords, prospective employers and even cellphone providers may pull your credit report as part of a background check, but there won’t be anything to see if someone has never managed a line of credit.
“Graduates with a healthy credit score have a distinct advantage over others,” says McClary. “Similar to a high grade point average, a high credit rating will open doors to opportunity when the time is right. Preserving that advantage often means waiting to build a strong financial foundation before making a lifestyle upgrade.”
Responsible students should be working toward an end game – moving out, buying their own car – and all of that is going to take a positive credit file.
Entrepreneurial-minded young adults who might one day seek a small-business loan will also need to have an established credit history. But just having a credit card isn’t enough – you have to use it and make payments on time in order to have evidence of responsible borrowing and repayment reflected on your credit report, says Freeman.
“Start out small, by perhaps charging gas on the credit card, and then paying off the balance in full at the end of the month,” he suggests.
2. A first credit card can be a teaching tool.
Going over monthly statements can be a powerful way for parents to help their students monitor spending, says McClary. “Take an interest by being actively involved as they learn the basics, then transition to the sidelines as they demonstrate responsible financial behavior,” he says.
What you want to avoid is becoming an enabler by paying off bills if they rack up too much debt. Instead, you can minimize the amount of debt your teen can accumulate by starting off with a small credit line, say around $300-$500.
“There’s nothing wrong with asking the issuer to cut down the credit limit,” says Freeman.
3. A credit card can offer peace of mind.
A credit card can be a handy financial tool when an emergency situation calls for more than what’s available in cash savings, says McClary.
Whether it’s a car breakdown, an unexpected medical visit or even having to spend more on books than was budgeted, parents can rest easy knowing their teen has credit at their disposal. Protect that peace of mind by having a plan to repay the debt as quickly and affordably as possible.
Of course, it’s on the individual to know what constitutes a real emergency, warns Ornella Grosz, author of “Moneylicious: A Financial Clue for Generation Y.” “It’s easy to swipe the card and use the emergency excuse, but an all-inclusive trip with your friends, for instance, doesn’t count,” she says.
In other words, talk to your child and go over some examples of when using credit in a pinch is OK so there are no misunderstandings or excuses.
4. Responsible credit use can come with rewards.
If your college student is going to get a card, he or she should take advantage of cash back or other rewards programs, suggests Grosz. Note that these programs are best for those who pay off their balances in full each month.
Freeman suggests focusing on simple products when shopping around for a credit card. Start with those that have good rates and no fees, and if possible, then look into cards that offer cash rewards as an added bonus.
Earning airline miles and other travel rewards might sound ideal for students who fly home a couple of times per year, he says, but it usually takes a significant amount of credit spending to earn enough points for a flight, and airline cards typically carry hefty annual fees.
By leveraging credit appropriately, says Grosz, college students can begin building a clean credit report and practicing smart financial habits that will help them achieve their future financial goals.