Credit cards have come under focus as of late thanks to the current financial crisis as credit card debt has become a major problem for many people. When this happens, people start missing payments which in turn allows companies to raise rates which can tarnish a credit score within a few weeks. When you are young often times you do not realize how important your credit score can be in your future. Students often times don’t think about purchasing a home or getting a loan for a credit card. However, with a poor credit score these days you might not be able to rent an apartment or get insurance and in some cases companies will look at credit scores before finalizing employment. All of these situations can come into play rather quickly when credit card debt becomes a factor.
So why do so many students get into credit card trouble? First off, once a person turns 18 they are able to get a credit card on their own and to be able to acquire loans. Many credit lenders see these people as prime targets. College students want to have money in their pocket and start acting and spending like grown ups. This seems to be one of the extensions of going off to college. Just look at any first day on a college campus and you will see many lenders that have set up booths looking to sign up new lenders. You also will see information for credit cards within their move in packages in the dorms.
There are quite a few problems that can come along with this sudden transition into the world of credit cards. Often times students are not up to date with the information about credit cards and the debt that it can bring on. These credit cards often times have high interest rates along with low minimum payments and harsh late penalties. This all gets compiled with the fact that it is common for students to have low paying jobs and part time work which can vary each week. Students do not always realize that their income can easily change from week to week, while their credit payments will remain relatively the same or even increase.
So why should a student get a credit card?
While there are drawbacks, there are also a number of positives that can be had for getting a credit card. First, credit cards allow for students to start building a credit history and rating of their own. Also having an emergency credit card in hand can be very valuable such an unforeseen situation arise, as it is uncommon for college students to have a nest egg to sit or fall back on. If something does happen they don’t have to reach out to their parents immediately. This can happen if a car breaks down, there are unexpected medical issues, or if there is a situation where a student needs to return home quickly. As a parent it is easier to help with a credit card payment than having to fork out a large sum of cash in an instant emergency.
Credit card history is very valuable to your credit score. For many their first credit card is the first time they are establishing any form of credit. When companies are looking to accept a loan application, having established credit card history is very beneficial. A positive history of paying off credit card debt allows your credit score to go up and that is why using the college years to build up a positive credit score will be very helpful down the road in life.
So how do you help your upcoming student make the right decision?
You need to educate your son or daughter on the possible pitfalls that can come up when looking to acquire their first credit card. Plain scare tactics are not going to work though, and you need to do your best to ensure that they understand the pros and cons that come with credit card use. It is also a good idea to take them to a bank and have them discuss all of the options in terms of credit cards, rather than letting them sign up for their first credit card based on a free t-shirt offer at their university fair.
It is also important to help them understand how and when payments need to be made. Show them how they can pay using a check or electronically, and let them know that setting up an automatic payment each month is helpful. This way they are expecting that amount to come out each month and can budget that in.
Finally setup rules for allowing them to use the card. Make sure they are responsible for the amount that they spend and remind them that paying for drinks at the bar is not an effective way to use their money. A credit card should be used for necessities, so be sure that they know if they want to use the card for a night out they know how they are going to pay it back.
Once your student understands the benefits and negatives of a credit card they, as well as yourself, will feel much more comfortable about the idea. Credit cards are a big step in life, and can have a lot of positives financially, just make sure that you instill the credit card basics before letting your student run wild.