Photo (cc) by ralph and jenny
The following post comes from partner site lowcards.com
It is almost time for high school graduates to leave for college and take that first big step toward independence. Soon parents will discover how well they prepared their students to take care of themselves–can they wash their own clothes, cook for themselves and live on a budget? Talking with your son or daughter about money management, credit scores, and the dangers of debt should be part of these real-world discussions.
“Managing money and the responsible use of credit is not something that just comes with age. These skills need to be taught and they are some of the most valuable lessons we can teach our children,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. “A few mistakes can cause real long-term damage to credit scores. If you co-signed on a credit card for your son or daughter, or have them on your account, their mistakes also become your mistakes.”
Begin with the basics of a checking account: making a deposit, writing a check, checking the available balance, using a debit card, balancing a checkbook, bounced checks, and insufficient funds.
“Even 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,” says Hardekopf.
Credit for College Students
Recent government regulations have limited payment options for students and have given parents more control and influence over their student’s finances. Before the CARD Act went into effect last year, credit card issuers aggressively courted college students, and it seemed that a name and address was the main requirement for a credit card. The CARD Act now limits credit options for younger students. If you are under 21 and want to open a credit card account, you now need to show you are financially able to make payments, or you will need an adult co-signer.
These strict application requirements have reduced the number of college students with credit cards as well as student credit card debt. While these regulations have helped protect colleges students from credit card issuers and debt they can’t afford, it has also limited their ability to start building their credit score while they are in college. Credit scores become important immediately after graduation because lenders, employers, and even apartment managers use credit scores to help make judgments about the applicant. A low or non-existent credit score could mean higher rates for loans or even a missed job opportunity.
Teach your student that credit records start early and that credit scores are almost as important as test scores. Show them a copy of your own credit report and explain how much creditors know about you. Tell them that creditors, landlords and insurance agents will use credit scores for judgments, interest rates and job offers. Late payments and maxed out credit cards can cause problems long after they happen.
Payment Options for Students Under 21
Credit cards. Students under the age of 21 can get a credit card if he or she has a co-signer or has proof of income to make payments. Co-signing should only be an option if your student can use a credit card responsibly. If the student makes a late payment, it also shows up on the co-signer’s credit report. If the student can’t pay off the debt, the co-signer is responsible for all the debt. Students should sign up for online account alerts. You can receive a text or an email when your payment is due, or if there is irregular activity in the account.As a co-signer, you will also receive a monthly statement. Before getting your student a credit card, parents should pull out your own credit card statement and use it to teach your student about the pitfalls of the credit card industry. Start with the interest rate and show how much more a purchase will cost if it is not paid off at the end of the month and you are charged interest. Show how long it will take to pay off a balance if you only make the minimum payment. Point out where to look for the due date and the consequences of a late payment (including late fee, penalty rate and a lower credit score). Warn about the high interest rate and fees for cash advances. Show them how to set up payment reminders. Explain that the credit limit is not a spending limit–if you must carry a balance, keep it below 30% of the credit limit. Discuss which purchases should not be made with a credit card. If they carry a balance, do not charge food, clothing, entertainment and non-emergencies on a credit card–they do not need to pay 15%-20% interest on a pizza or a movie.
“Before applying for the 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,” says Hardekopf. “If they can’t afford a payment with cash, they can’t afford it with a credit card.”
The Citi Forward Card for College Students rewards students for staying within their credit limit and paying on time with 100 bonus points per billing period and a possible reduction in your interest rates. Students can receive up to eight reductions for a 2% total reduction. A cardholder receives 1,000 bonus points when they sign up for paperless statements. The card also offers five points per $1 spent at movie theaters, restaurants, book stores, and video rental stores. The interest rate is 13.99%-22.99%.
- 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 there may not be a sufficient balance during an emergency. Online account alerts can notify you when the account falls below a specified balance. Fees are increasing for checking accounts and debit cards so teach your student about ATM fees, insufficient funds fees, and overdraft fees. “Help your student set up a routine to check the available balance and account activity,” says Hardekopf. “Teach them how to handle problems like fraudulent charges or a stolen card. Your liability depends on how quickly your report the loss.”
- 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. Finding a good prepaid card can be confusing and some cards offer sign-up promotions like free movie tickets. Prepaid cards don’t charge interest rates, but the fees can quickly erode the value of the card. One of the best options is the recently-introduced American Express Prepaid Card because it has fewer fees than most prepaid cards.
- Secured Cards. Secured cards are relatively easy for anyone to get because it is secured by a prepaid deposit. They 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 and ask which agencies the card reports to. Secured cards from Orchard Bank and Public Savings Bank both report to credit agencies.