Every fall, thousands of students trek off to college with independence in mind — and credit cards in hand. Establishing credit (and good spending habits) is an essential part of striking out on their own, but what can you teach your children so they don’t flunk out of their financial responsibilities?
College students who use credit cards have an average monthly balance of over $1,423. That, combined with the lack of experience many students have in dealing with credit card debt, along with the growing burden of student loan debt graduates now shoulder, creates a potential perfect storm of financial stress for young people.
Fortunately, the Credit CARD Act of 2009 (commonly referred to as the Credit Cardholders Bill of Rights) helps protect college students by ensuring greater transparency regarding interest rates and fees, as well as prohibiting aggressive marketing tactics aimed at them. It also bans credit card approvals for anyone under 21 years old unless they have an adult co-signer or can prove they have sufficient income to pay the bills.
There’s also several things you can do to help your college student use credit wisely — and work toward financial independence:
1. Discuss the benefits of credit card ownership.
While having a credit card does come with potential pitfalls for today's college student, make sure yours udnerstands the positive aspects of credit card ownership, such as the opportunity to establish credit, the benefits of paying off the balance each month and maintaining a good credit score.
2. Emphasize the importance of emergency-only usage.
As your child will be bombarded with many opportunities to buy new and fun things (clothes, trips and take-out food, for starters!) emphasize the importance of spending wisely and focusing on using a credit card for emergencies only.
3. Pay more than the minimum to avoid added interest.
Help your children understand that paying the minimum amount each month does little to pay off the credit card balance over time – and how the corresponding interest rate accumulates.
4. Have a plan for making monthly payments.
Make sure that you and your child have a plan in mind for making the monthly payments — and that he or she will call you immediately if any problems arise. These could range from having their card stolen or a purchase showing on the card that was incorrect or much higher than your child antcipated.
5. Explain how the annual interest rate works.
Encourage them to understand how the Annual Percentage Rate (APR), the yearly rate of interest on your card, works — and how that interest can pile up over time on unpaid card balances. Also encourage them to learn what types of terms, late fees or penalties (i.e., the fine print) come with credit card ownership.
Here's a bonus tip for extra credit
Perhaps the best way for college students to manage credit card spending is to employ a little trial and (not too much!) error. One way to stay a step ahead of your purchases is to use expense tracking apps like Mint or Goodbudget.