For many students living on their own at college, credit cards have become a way of life. Credit cards aren’t inherently bad. You just have to know how to manage credit and debt wisely. You also have to realize that if you carry a balance or make minimum payments, you’ll be charged interest on top of the costs of the goods or services you purchased.
So what can young adults heading off to college do to develop proper money habits and avoid excessive credit card debt? In College Secrets, I offer six credit card dos and don’ts for parents and their college-bound sons and daughters.
1. DO consider making the student an authorized user of the parent’s card
Although federal laws now restrict credit card marketing on campuses, students can still be inundated by offers from banks and credit card companies.
For many students, it’s tempting to sign up for the first credit card offer that comes along, or even multiple cards, to cover personal and educational expenses in a pinch.
But for teens and young adults without proper budgeting know-how, or those who have never handled a credit card on their own, it may be better to start them off as an authorized user on a parent’s credit card.
This will allow the parent to monitor the student’s spending and keep him or her accountable for any purchases made using that card.
2. DO weigh the pros and cons of having the student use a debit card
If you’re a parent and you don’t want your child linked to your credit accounts, or you’re concerned about his money-management skills, suggest that he get a debit card that he can use to pay his bills.
It’s a good way to help students effectively manage their money without worrying about the hassles of writing checks for day-to-day purchases.
Still, students do need to keep track of how they use their debit cards, either by keeping a running total of their card usage or regularly reviewing their online statements.
Debit card users can also set up email alerts as notifications when their balance runs low. This is a smart idea, because you don’t want to use the card when there’s not enough money in the account to cover your spending. If you do, you may get hit with overdraft fees or other bank charges.
3. DO consider the benefits of secured cards
If you’re a college student and you want to establish a credit history during your college years, one way to achieve this goal is by applying for a secured credit card. You can manage that account on your own, or you can become a joint account holder with a parent.
Just like traditional unsecured credit cards, secured credit cards help people build credit by reporting one’s payment history to the credit bureaus (Equifax, Experian and TransUnion).
But secured cards differ from regular, unsecured cards in one significant way. Secured cards require a security deposit, which then becomes the credit line.
For example, if you put $500 on deposit with a bank, that bank can provide you (or your child) with a secured card that has a $500 credit limit. Parents who are co-users of their child’s secured card would have access to that account, but could choose not to use it.
4. DON’T apply for several cards at a time
College students ready for a credit card should be selective in choosing which cards to apply for, to avoid hurting their credit scores. All credit card applications show up as hard inquiries on a credit report.
Too many inquiries drag down your credit score, since inquiries stay on your credit report for two years, and they count against you—for the purpose of calculating your FICO credit score—for one year.
5. DON’T overlook student credit cards
If you think you (or your child) can be responsible enough to handle a credit card, by using it only when appropriate and/or paying off credit card balances before the end of each month, then consider the benefits of a student credit card.
These cards offer rewards such as cash back on certain types of purchases, or airline miles and discounts to get you back home for the holidays, or to cut travel costs during spring break and other time periods.
All students should strive to maintain good credit. That’s especially true for those completing their studies and entering the workforce, since employers are increasingly using credit checks as a way to screen job applicants.
Whatever credit card you or your children choose, just make sure to read the fine print for information about annual fees, interest rates and other terms.
6. DON’T forget to set specific guidelines and spending limits
Whether or not a parent adds a child to a credit account or the student applies for a separate credit card, it’s important for families to discuss the prudent use of credit and when credit cards shouldn’t be used.
It’s far too easy to lose track of money spent while in college, with tuition bills each year—not to mention books, supplies, food and other expenses.
Parents should create realistic spending limits and urge their children to stick to those limits.
Also, recommend that your child avoid using credit cards for routine day-to-day purchases that could easily be paid for with cash. Ditto for big-ticket items that he or she may not be able to pay off within the month.
Similarly, if you want your child to use the credit card for emergencies only, say so.
Despite the high credit card bills often racked up by college students, those four years spent earning a degree don’t have to burden them with unmanageable debt.
If you follow the six do’s and don’ts listed above, students can learn lifelong money-management skills and keep credit card debt to a minimum—even while they’re pursuing a higher education.