Many students will soon leave home for college, taking another step toward independence and managing money on their own. Students unprepared for new freedom can quickly go into debt and ruin their credit score. Parents need to make sure students are prepared to live on a budget as well as understanding the right way to use credit, stay out of debt and build a good credit score.
Parents should make a money management plan with their student. Set a deposit schedule and amount of money that you put into their account. Talk through all bills that will need to be paid and how they will be paid. Make a plan for who will pay for the entertainment and incidental expenses. Go over the basics of a checking account: making a deposit, writing a check, checking the available balance, using a debit card, balancing a checkbook, overdrafts, bounced checks and insufficient funds.
Share with them your personal money management stories. If you have made mistakes, or struggle with your own finances, use these as lessons and warnings for your children. Teach them about the consequences of those actions.
Payment Options for Students Under 21
* Credit Cards. Three years ago, the CARD Act made it harder for college students to get credit cards. The legislation prohibited issuers from luring college students to apply for a credit card by offering free pizza or t-shirts. Today, a young adult under the age of 21 can get a student credit card if he or she has a co-signer, or has proof of enough income to make payments. Co-signing should only be an option if your student can use a credit card responsibly. Otherwise, a late payment by the student also shows up on the co-signer’s credit report. A parent should make it very clear that the student can damage the parent’s credit score if he or she does not pay the credit card bill in a responsible manner. If the student can’t pay off the debt, the co-signer is liable for the entire debt.
Before applying for any credit card, make them understand the importance of paying off the entire balance on time each month and create that good habit by the first bill. If they can’t afford to pay for an item with cash, they can’t afford to buy it with a credit card.
Credit cards can be useful if you know how to use them correctly. Before your student signs up for a credit card, pull out your own credit card statement and use it to teach your student about the dangers of paying with plastic. Start with the interest rate and show examples of how much interest can add to the cost of a purchases if you carry a balance.
Show long it will take to pay off a balance if you only make the minimum payment and explain the consequences of a late payment. Show where to look for the due date. Warn about the high interest rate and fees for cash advances. Show them how to set up payment reminders via email or text messages. Explain that the credit limit is not a spending limit–if you must carry a balance, keep it below 30% of the credit limit. Use your own struggles and mistakes as lessons and warnings for your children.
Some payments should not be made with a credit card. If you carry a balance, do not charge food, clothing, entertainment and other non-emergency items. It is foolish to pay high interest rates on pizza and clothes purchases.
* Debit Cards. These cards are tied to checking accounts and are easy to obtain if you have an account. However, debit cards do not help build credit scores and they may not provide enough cash during an emergency. Online account alerts can notify you when the account falls below a specified balance. Teach your student about ATM fees, insufficient funds fees and overdraft fees.
* Prepaid Cards. Banks and credit card issuers have enthusiastically jumped into the prepaid market because there are fewer regulations and a wide variety of fees. Some prepaid cards are now presented as alternatives to checking accounts with direct deposit, bill payment and ATM withdrawal. Prepaid cards don’t charge interest rates, but the fees can quickly erode the value of the card. Good options are the American Express Prepaid Card and Chase Liquid because they have fewer fees than a number of prepaid cards.
* Secured Cards. Secured cards are relatively easy for anyone to get because they are secured by your own prepaid deposit. They may also have many fees and high interest rates so compare the terms and conditions before applying. A secured card can help build your credit score if it reports to a credit agency. However, some cards don’t report to credit agencies, so call the issuer to verify. Secured cards from Capital One report to credit agencies.
Teach your student that credit scores are almost as important to their future as test scores. These records start early, so the mistakes they make today will still be on their credit report years from now. This will affect everything from interest rates and loan offers to apartment rentals, insurance and possibly job offers. Show them a copy of your own credit report and explain how much creditors know about you–everything from late payments on rent to the available balance on a credit card.
It is also time to start planning for student debt. Two-thirds of those who graduated from college in 2011 graduated with an average student loan debt of $26,600, according to the Project on Student Debt. In 1993, less than half of students graduated with debt, and those who did owed an average of $9,350. Since your student will be responsible for the paying off the student loan, this is the time share the overall tuition numbers and be clear about how long it will take to pay it off. The traditional repayment period for student loans is 10 years; however, payments can be stretched out to 20 or even 30 years with a greater amount of interest penalties.
LowCards.com simplifies the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates. It also gives an unbiased ranking and review for each card. The LowCards.com Complete Credit Card Index is the most objective and comprehensive resource on the Internet which allows consumers to compare rates for over 1000 credit cards offered in this country. Created by Hampton & Associates, the company has been analyzing the credit card industry and supplying objective websites on various consumer expenses for 13 years.
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