As kids head back to college for the new semester, they may be asking for a credit card to help with their groceries, meals or other expenses. But before handing over that little piece of plastic, consider these facts:
- Only 26% of teens understand how card interest and fees work.1
- The average college senior will graduate with $4,100 in credit card debt before they even have a job.2
- Nearly 20% of bankruptcy filers are college students.3
Send them off with a good credit education
Parents should take an active role in helping their children understand how to use credit responsibly. Don’t assume this will be taught in school or by their peers, because it probably won’t. Chances are your teen has grown up watching you swipe your card for purchases. But does he understand how credit works? Does he know about interest, credit limits, and late payments? Does he realize that today’s credit behavior can affect his life for years—when his goals may be very different?
Use a debt calculator to show how making the minimum payment each month can quickly add to the cost of using credit. For example, pay $50 a month on a $2,000 balance at 18%, and it will take more than five years to pay off the debt—and you’ll pay over $1,000 in interest!
Consider the credit options
Take baby steps. It’s a big leap to go from a child’s savings account to a credit card. Good intermediate steps could be a:
- Checking account
- Debit card
- Secured credit card with a pre-paid limit
Whatever option you choose, follow these guidelines:
- Set monthly spending limits
- Monitor card use
- Review statements together
- Let your child be responsible for paying the bill in full each month
With the new Credit CARD Act there are limitations around the marketing of credit cards to college students or young adults, and there are requirements about proving their ability to pay unless they have a co-signer. If you opt to co-sign, be aware that the credit history will be reported for both you and your teen. While it can help your teen establish a credit history, you are legally responsible for the debt.
Talk about credit reports and scores
Make sure your teen understands about credit reports and credit scores, the “real world” equivalents to a report card and GPA. The harsh truth is that the credit bureaus track credit behavior from the first credit card when it is reported. Negative things, like missed payments, will stay on the report for at least seven years. Meaning today’s credit behavior can still be affecting their life and wallet when they graduate and have very different financial goals and responsibilities.
Read our Good Credit History article to find out why it’s important to build credit early. Send your teens off to a school with a good credit education, and you’ll prepare them for a healthy financial future.
1 2007 Charles Schwab 2007 Teens & Money Survey
2 Sallie Mae, “How Undergraduate Students Use Credit Cards: Sallie Mae’s National Study of Usage Rates and Trends 2009″
3 American Bankruptcy Inst. Cited in USA Today, Wall Street Journal, CNN-Financial, and The Gallup Poll, 2001
[JL1]Since we are bureau, let’s stay away from this sort of editorial.