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Credit cards and your college student Thumbnail

Credit cards and your college student

It’s almost Thanksgiving, and if your college age student brings up the question of “Am I at the age where I should take out a credit card?” at the dinner table, have you thought about your response?

To start, credit card companies do a great job of hooking students with freebies and giveaways. They make these offers knowing that a student’s parents will have to bail them out if they are unable to meet their payments. For many students, they can be quickly lead into trouble and once in credit card debt, can find it almost impossible to climb out.

On the other hand, there are also benefits associated with a credit card for a college age student. And no, I’m not just talking about that 1.5% cash back that your child will receive on their 2AM order of Domino’s cheesy bread after a night out.

For some students, having a credit card serves as a way for them to learn about credit, and build a credit score. This opportunity to build credit while meeting small monthly payments can be valuable, as it won’t be long for your student before they will need credit history for a purchase such as buying a car or a house.

As a personal example, I took out my first credit card as a senior in college last fall, and used it as a great learning experience. For me, it was an opportunity to research and learn about credit while also learning to budget and meet the requirements of monthly payments. The extension of credit allowed me to attend a senior class trip to the Bahamas that would not have been possible without it. However, I was extremely careful to not carry a monthly balance on the card and I carefully planned how much I would have to work to pay off this trip.

As a parent, you know your child best, and their level of financial responsibility and experience. For many young adults, taking out a credit card can be disastrous, leading to an additional debt to pay off after graduation on top of looming college loans. An interesting 30-second video on this subject can be found here: https://youtu.be/8YiMmTkJobw[1]

Recent legislative reforms have established requirements for those under 21: They must now have recurring income or a cosigner before taking out a card[2]. Yet students can still easily fall prey to the enticing 0% teaser interest rates that quickly balloon to 25% after the intro period if they are not careful.

This can present a difficult situation for a young adult scraping by on a minimum wage part time job and a college budget, especially for someone who hadn’t previously calculated these interest payments into their budget and is inexperienced with credit cards.

For example, consider a student that has a $1,000 balance on their credit card with a 25% interest rate and a $25 minimum monthly payment. If this student is unable to find work after graduation and is only able to make the minimum monthly payment on the card, this $1,000 balance will not be paid off for 17 years, and by that time the student will have already paid $2,700 in interest.

It’s clear to see how easy it can be for students to quickly engulf themselves in credit card debt if they are not careful. For parents of students looking into taking out a card, it is critical to make sure your student is knowledgeable. No student should take out a credit card without knowing the ins and outs of interest charges, the credit card minimum payment, and other fees associated with the card.

Do you have questions regarding whether a credit card makes sense for your child? Give us a call, we’re here to help.

 

All the best,

Andrew Holmes

Andrew@PlanWithFPS.com

617-630-4978

 

Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.

 

[1] “FreeCreditScore.com College Coed Commercial (Solved: Dakoda Gorman).” YouTube, youtu.be/8YiMmTkJobw.

[2] Credit Card Accountability Responsibility and Disclosure Act of 2009. Federal Trade Commission, 22 May 2009.

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