Your child is off to college this fall and there is a lot of preparation to do, much of which is financial, such as paying the tuition. But this is only the beginning. Once your child arrives on campus, you can look forward to a continuing stream of purchases, such as textbooks, stuff for the dorm room, clothes, entertainment, and those unforeseen expenses. It is not so convenient for your child to have to call you all the time asking that you send money. A credit card could be the perfect answer, plus it gives him or her a taste of financial independence and responsibility.
All of this is great as long as you continue to be involved with your child rather than allowing the credit card to be the end of financial discussions between you. Stay involved, encourage your child to budget, to use the card with restraint, and check in each month to inquire about the balance, payments, etc. If you are fully involved, then a credit card can be a very good asset and here are some reasons why.
The bright side
- A credit card teaches financial responsibility: how to budget and manage debt, pay bills on time, and restrain binge spending.
- Teaching your child about the pitfalls of credit card spending and how to handle credit mistakes is much easier now than when they graduate and will, most likely, be facing student loan debt.
- The credit card is an excellent way to learn about the connection between their spending habits and their FICO score. After graduation, college students will be renting or buying their first home and a landlord or mortgage company will check their FICO. Same for buying an automobile. If they graduate with a poor FICO score, they will find themselves paying higher interests on loans and higher security deposits for rental homes and utilities. Also, many employees today are looking at credit scores, so a bad FICO could cost them their dream job. It is good to be grounded in these realities early to avoid the pain later.
- A number of credit card companies are offering an option of using reward points toward student card debt. The rewards are paid out in the form of a third-party check that can be sent to the student loan holder. Both private and federal student loans are eligible.
The dark side
- A credit card can encourage unfettered spending. When your child does not need cash in the wallet to make a purchase, it is much easier to go ahead and buy. Using the credit card is painless, that is, until the bills arrive. This is why your involvement with your child is key to his or her success.
- A credit card can become a way to impress friends. Having a credit card can give status to your child, and he or she could easily begin to use the credit card to buy tickets to shows, go on exotic vacations, dine at expensive restaurants or purchase expensive gifts.
- If your child misuses his or her credit card and fails to make the payments, the credit card company can sue you. Students under 21 are now able to secure a credit card in their name alone, but the trade-off was granting to companies the power to come after parents for the unpaid balance.
- Credit card companies are very aggressive on college campuses, and your child may apply for and receive multiple credit card accounts, and then charge to the limit on each one. This sets up a post-graduation debt nightmare.
Bottom line is that a credit card can be a very good experience for both you and your child as long as you stay involved with him or her, monitor their credit card spending and lovingly remind them of how important it is to leave college with as little debt as possible.