Parents of college students often ask themselves how to best guide their teenagers into adulthood, and one major task is determining if and when students should be encouraged to have a credit card. Many parents believe that discouraging young adults from having any debt besides student loans is the best course of action, but having a good credit history established during college will help with independence during post-college life.
Let’s discuss credit cards and how to determine if your student is ready for one!
Why Your College Student Should Have a Credit Card
Having a credit card and making on-time payments will establish a good credit history which will be important when they want to rent an apartment or buy a car later on. Using a credit card with a small credit limit will help teach good financial habits and manage debt wisely without risking having a considerable debt load due to too many cards or high balances.
Making purchases with a credit card is more secure, especially online. If their credit card information is compromised, cancel the card and dispute the charges without risking their money.
Risks and Bad Habits to Avoid
One of the most significant risks when dealing with debt, especially credit cards, is carrying too much debt and not being able to make minimum payments on time because missed payments have a long-term impact on their credit score and affect the interest rate paid on the future debt.
Our culture has conditioned many of us to mindlessly swipe our credit cards when we want something, which can lead to a bunch of stuff we don’t need and a hefty credit card bill. This risky behavior is a bad habit that should be avoided.
Using a credit card when you don’t have a steady income is risky behavior. According to the Credit Card Act of 2009, adults under 21 years of age need to have a co-signer when applying for a credit card or proof that they have a steady source of income. If you are a co-signer for them and they can’t pay the bill, the lender will look to you, as the co-signer, to pay the bill. It’s important to teach your kids good debt management habits.
When first learning how to manage credit wisely, take out one credit card and avoid keeping more than 30% balance on it month to month. A gas credit card is a good card to start with because they can fill up their tank and pay off the card without running up a huge balance on a retail or traditional credit card.
Many credit card companies try to gamify their credit card rewards by creating fancy apps or extra perks for buying so much of something in a month. This can be hazardous to your young adult’s budget if they allow themselves to get caught up in the game. Have a conversation with them about various marketing techniques aimed at getting people to spend more money and how to avoid this risky behavior.
Credit Card Options for College Students
- Add them as an authorized user. This option allows your young adult to build credit without having the responsibility of paying the bill. It’s recommended to add them when they still live under your roof, and you can monitor their spending habits and then guide them in the way they should go. If you have an excellent credit history already, this can get your kid’s started on the right path when you make on-time payments because it’ll build their credit. Authorized users will be impacted if the account holder misses payments, so it’s important for both of you to know that and be on the same page.
- Students secured credit cards. These cards are introductory credit cards for people who either have bad credit or no credit. You put down a cash deposit to get approved for the card. This works like a regular credit card and minimizes the risk to both the cardholder and the lender. Most cards offer a $200-500 limit. This is different from a prepaid card and still has a minimum monthly payment due, with the cash deposit acting as a backup if the cardholder defaults on payments. Most have an annual fee, so be sure to understand the credit card terms.
- Entry-level rewards cards or student cards. These are generally unsecured cards that don’t require a cash deposit like secured cards do but are given low credit limits to build up credit for a new borrower. Ask the lender if they offer free FICO score tracking or access to their credit report to monitor how they are doing in building their credit. Rewards cards offer the added incentive of cash back or travel rewards which is a great perk but can be detrimental if the cardholder is impulsive. Do research on the benefits, fees, and perks of the card to find the best one for their needs. Saving money on travel is great, and travel hacking is an awesome way to travel for cheap, but there is an entire system of how to best use the rewards points and how to stack them to get the best use of your dollars.
How to Know Your College Student is Ready for their First Credit Card
As parents, we know our kids and their personalities. We see if they are impulsive or incredibly responsible. You also know their spending habits and the financial lessons you have taught them over the years.
How have they responded to financial lessons, and what are their spending habits like?
Are they savers or spenders or a little bit of both?
Have you ever let them use your car? Think about how they treat things that aren’t theirs. Did they give you the car back in good condition and a full tank of gas? Were they responsible with your car? Were they back before curfew?
As your child grows, give them an allowance weekly and guide them in how to manage their money. By the time they are adults, they should have a good sense of how to pay bills on time and savings. This will allow you to see how they manage money and how they take your guidance regarding adult activities.
If your young adult is not the most responsible person when they first go out on their own, give them a card with a low credit limit for emergencies rather than impulsive shopping sprees and keep an eye on the balance to monitor what the card is used for. Teach them to maintain 30% or less of a balance or to pay it off in full every month if they can.
Check and Balances for Practicing Smart Money Habits
Make sure that you are their primary source for financial education rather than expecting the school system, Internet, or friends to do the teaching for you. Keep an open line of communication with your kids throughout their lives, so they are comfortable coming to you to talk out situations or problems. Good money habits aren’t established overnight, so be patient with them and use real-world scenarios because those are the best teachers.
Think about how you feel about debt and the lessons you have learned about money management. Would you have rathered if your parents had had conversations with you about money if they didn’t? How would that have changed your outlook on life and money now?
Allow your kids to make mistakes when they are young. Encourage them to find opportunities to learn about annual fees, interest rates, credit reports, credit history, late fees, statement dates, due dates, and debt management. Personal finance can be a boring topic, so find ways to make it fun and interactive, especially for younger children.
Set up a bank account first for your child and allow them to use a debit card to get used to managing money. Sallie Mae did a study that found that 85% of college students have used a debit card and still had one in their possession. 40% of college students haven’t been taught anything about credit cards, which is a huge disservice to them and could cause young adults to end up in a cycle of debt that they can’t pay off because they were never taught about money.
Students having a credit card is a great way to build their credit in a safe and relatively low-risk way. Choosing the right card with the right credit limit is key to starting out adulthood well. As parents, it’s our job to educate our kids on how to manage money and avoid the pitfalls that big companies would love for us to fall into that would cause us to pay high-interest rates or large monthly payments because that’s how they make money off of lending money to borrowers. Having open conversations about money and debt management early in life will set your kids up for success!