College Students and Credit Cards
By Joe Messinger, CFP®
September 21, 2018
According to the Federal Reserve Bank of New York, the total credit card balance in the US reached $829 billion in the second quarter of 2018. (This number pales in comparison to the total student loan debt figure of $1.41 trillion.) Starting out life with large credit card debt will hamper a student’s financial health after graduation. However, being responsible with credit and learning how to properly use credit cards is extremely important. Parents can be the support students need to learn responsible credit practices.
College students are fresh meat for credit card companies. Credit card companies assume parents will bail out a student who charges too much. They hook students at a young, unsuspecting age, and they hope for a client for life. Students are particularly susceptible to the marketing lures credit card companies will use, and too few students have the wisdom to make smart credit choices.
“More than $23 billion in credit card debt was delinquent in the first quarter of 2018, according to NerdWallet’s analysis.” The primary reason is probably not what you’d think. According to 35% of the respondents, they simply forgot to make the payment. (In second place at 30% was needing to spend the money on essentials.)
Students can quickly ring up large balances without parents even knowing their student has a card. While federal law requires students now have steady income to get a credit card without a cosigner, the law does not define what steady income is. (Back when we were in college, students could get huge credit card balances without having any verifiable income. Luckily, those times have changed.)
Students simply don’t understand how credit cards work and can get in over their heads.
Teachable moments for families
Parents can take the lead to discuss with their students some best practices for credit cards. They can discuss the importance of paying off the credit card in full each month–not charging more than they can afford to pay–or having a plan for paying it quickly. Also, the importance of being on time with payments and staying organized in their financial lives.
It’s also an opportunity to teach them about credit scores–what they are used for, how they are determined, changed, and impacted. A good article detailing the ingredients that go into a credit score can be found here. Obtaining a card in college (or even high school) starts that early credit history when the card is used in a responsible way.
The flip side
Some will argue that a better idea is for your student to have and use only a debit card. If you are truly teaching your child to live on a cash basis, then yes that is true. However, parents can still teach students about credit cards and how they work and their potential pitfalls. Because the truth is very soon your high school student will be off at college with their own mailing address (without your watchful eyes), and you want them to have the knowledge they need to make smart financial decisions.