Students and parents usually discuss a wide range of topics in preparation for that first year away from home. But one of the most important (and oftentimes neglected) subjects is finances. It’s entirely possible that up until now, you’ve either given your young adult money or handed them your credit card to use. While it’s true that many teens have jobs and bank accounts, a lot of them still rely on their parents to handle any expenses that may come up. This is the perfect time to discuss financial matters if you haven’t yet done so and also to weigh the benefits of getting your student a credit card.
Probably the biggest reason to get a credit card for your son or daughter is it allows him or her to begin building good credit. With responsible use- always paying the balance in full each month and never missing a payment- your college student can establish and build a solid credit history. This will be invaluable later on when it’s time to buy a car, or rent an apartment, or take out any type of loan.
This is a great opportunity to explain to them how their credit score can impact their finances such as the loan terms they will receive (annual percentage rate, down payments, etc.). The higher percentage rates that come with a poor credit score translate to hundreds and sometimes thousands of extra dollars spent on finance charges. Let them know that a lower credit score can even affect their ability to rent an apartment or purchase a home.
Credit cards can be excellent teaching tools to help a college student develop sound financial habits. It also can present some very real dangers if not used correctly. Your student needs to understand that a credit card isn’t a blank check to buy anything they want. Proper usage should be clearly defined. For example, buying needed supplies for a class as opposed to shopping at the mall. You should discuss how the monthly bill will be paid. Will your student have a part-time job? Do they have savings? Will you be covering the charges? There needs to be open communication between you both so that there are no surprises.
Lastly, if you are planning to cover all the expenses on the credit card you may want to consider a prepaid card which comes with set spending limits. This might be a good option until your student shows that he or she can successfully budget and use a credit card. The drawback of this type of card is that your student will not build a credit history since prepaid cards do not report to any credit agencies.