How students can use credit cards more wisely

Now is the time that many families with college-bound kids will be making the final preparations for students to go off to school, and for some, that includes getting the child a credit card.

While there are a number of restrictions on exactly how those under the age of 21 can obtain a credit card of their own, it is still possible to do so, and these accounts need to be approached responsibly, according to a report from Fox Business. Prior to the passage of the Credit Card Accountability, Responsibility and Disclosure Act of 2009, significant amounts of college students had free access to credit cards and spent lavishly on them. That year alone, according to student lender Sallie Mae, the average freshman carried $2,038 in credit card debt, while the typical senior owed more than double that amount, $4,138.

Now, the Credit CARD Act requires that those under 21 either have a co-signer on their account or otherwise prove that they have personal income significant enough to pay back any balances they might accrue, the report said. But the problem with this is that what, exactly, defines enough income is not clearly expressed in the legislation, and can include money from student loans. Further, many young adults might enter into co-signed agreements without fully realizing everything these deals entail.

What parents should do

Because of the many risks that credit card use can pose to first-time borrowers, it’s vitally important that parents take the time to talk to their kids about the various pitfalls they may run into due to their lack of experience, the report said. Perhaps the most important wisdom an experienced card user can impart to a first-timer is the importance of imposing limits on oneself. While credit cards may carry limits of their own, these are often sizable and can therefore lead to significant amounts of debt if not properly dealt with.

One way to do this is to make sure kids know to carefully go over their statement every month so that they realize exactly how much spending they’re doing, the report said. This might be a bit of a culture shock after the first month the account is open, as they may be more likely to spend freely on the new card. This kind of monthly diligence could engender a more cautious approach going forward.

Further, parents may also benefit by taking the time to explain all aspects of the account with their kids before giving them the card by carefully going over the terms and conditions for it, the report said. Understanding interest rates, fees, penalties, and related factors may be beneficial to young borrowers who have limited or no credit experience of their own. If they know the full cost of using these cards, they may be more likely to approach them cautiously. However, for accounts that come with rewards benefits, it’s important that kids know how spending to get them will affect all aspects of their finances. Unless their spending and repayments habits are managed properly, in such a way that the amount of points they earn will surpass the costs associated with such an account, they will actually be paying to use it, rather than reaping all of the perceived benefits.

Finally, it’s also important to make kids fully aware of the various consequences of their actions, the report said. This includes not only familiarizing them with how interest is calculated and added to their debts, but also what happens if they miss payments or carry a sizable balance. However, the discussion should not just be about money, but also about how these missteps will affect all aspects of their credit. Further, it will be necessary to explain how a diminished credit rating, in turn, will take a significant toll on everything from their ability to obtain affordable financing in the future, or even get an apartment they want.

These days, despite the Credit CARD Act, college kids are graduating from school with tens of thousands of dollars in debts to their names. This includes credit card balances, but also those for student loans, auto financing and so forth, and makes it very difficult for even the most diligent to gain complete financial independence soon after getting out of school.

Parents might also want to let their kids know how they can find out their credit score, what it means and, if there’s any damage to it as a result of account mismanagement, how to increase their credit score going forward. Because your credit score plays such a significant role in all financial aspects of your life, it might also be a good idea to brush up yourself before giving your kids some advice on the subject.

Posted in Credit Card
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