Credit Card Smarts
Take Charge of the Cards
Imagine your child being 30 years old and still paying off a slice of pizza bought when in college. It may sound crazy, but problems with credit card debt can lead to this scenario.
Learning how to use credit cards responsibly now can save your child from having to dig out of debt after graduation. It also helps prevent your child from having a bad credit history.
The loans your child takes out for college need to be paid back. After adding a large monthly credit card bill (avoid the temptation to charge the tuition!) to that amount, your child may be in a very difficult situation financially.
Credit Cards and College Students
Credit cards are an indisputable fact of life and there are many good reasons to have one. They give protection for purchases, enable online shopping, and provide a cushion in case of emergencies. The secret is to use the credit card as a tool when necessary, but not to excess. Discuss with your child what kind of expenses it is reasonable to charge.
Credit card abuse has become such a problem that, in February 2010, the federal government recognized the importance of protecting college students from the consequences of misusing credit cards. They enacted legislation changing how credit card companies can do business with students. Although the law provides some protection, it’s still up to your child to manage credit wisely.
The law bans credit card companies from issuing cards to people under the age of 18. People who are under 21 years old need an adult cosigner to get a card, unless they can prove that they have the financial means to pay their bill. Other provisions in the law limit some of the fees credit card companies can charge — and, in response, the companies are raising interest rates to avoid losing income. Anyone without an established credit history may face the highest interest rates — and that group typically includes students.
Credit Card Offers on Campus
Your child can find plenty of opportunities to apply for a credit card once on campus. It shouldn’t surprise you that the companies are allowed on campus; many colleges earn money by permitting this practice and from creating affinity cards — credit cards that include the name of the college. The law requires that educational institutions and credit card companies disclose these agreements, but the messages may be subtle. Make sure your child understands the basics of fees and interest rates.
Carrying a Balance Can Be Very Expensive
Credit cards are actually high-interest loans in disguise. Credit card companies may lend money, but they get it all back and a lot more by charging fees to the borrower. Finance charges on the unpaid portion of a bill can be as much as 25 percent each month, and cash-advance fees have even higher interest rates. Annual fees just to carry the card range from $20 to $100; there are also late-payment fees, typically $25-$50.
Not paying off the entire balance each month can lead to big finance charges. Take the story of Joe: Joe's average unpaid credit card bill during a year is $500, and his finance charge is 20 percent — so he has to pay $100 in interest for the year. He pays a $20 annual fee per year, plus a $25 late fee one month (he was up late studying and forgot to mail in his check). After a year, Joe ends up owing $145 in interest and fees to his credit card company, and he still hasn't paid for any of his actual purchases!
Your Child’s Credit Report Matters
The college years are an important time to build the good credit history your child needs after graduation. Credit reports are generally required to apply for an apartment or finance a large purchase, such as a car. Employers often review a credit report when they hire and evaluate employees. Problems with credit cards, such as late or missed payments, stay in a credit report for seven years.
Help Your Child Be Credit Smart
Remember, the person who signs up for a credit card is the one responsible for paying the bills. To lay the foundation for a financially healthy life, review these rules of credit management with your child:
- Consider using a debit card instead of a credit card. Money is deducted directly from your checking account, so you can't spend more than you actually have.
- Read all application materials carefully — especially the fine print. What happens after the "teaser rate" expires? What happens to your interest rate if you're late with a payment or fail to make a payment? What's the interest rate for a cash advance?
- Pay bills promptly to keep finance and other charges to a minimum; pay the balance off if you can.
- Use credit only if you're certain you are able to repay the debt.
- Avoid impulse shopping on your credit card.
- Save your credit card for a money emergency.
Additional Credit Card Advice
The Federal Trade Commission provides free information to consumers on dozens of topics related to credit and credit cards.
