Last weekend the local paper had a financial advice column for parents of students headed off to college. This “financial expert” suggested that even though building a credit history important, college freshman and sophomores are likely not ready for the responsibilities of a credit card. In this experts eyes, credit cards are something parents should encourage their college kids to avoid.
This advice struck me as completely out of touch with reality. First of all, many parents are letting their kids sign up for student loans that could be over $30,000 in the very first year! To suggest that these students can’t handle the responsibility of a credit card is absurd.
Secondly, there are really only two possible outcomes if Junior gets a credit card. Either he is responsible with it, or he isn’t. Obviously, there is some middle ground. However, regardless of the responsibility level of the college student, getting the credit card will be for the best.
Suppose your college student is responsible…
Building a long credit history is a great thing. The sooner you establish that first line of credit, the older it will be when the time comes to buy a house or start a business. Long established lines of credit with timely payments are great for the credit score and can make a huge difference in future interest rates.
Not only is having a credit card good for your credit score, but it is also great for getting into positive habits. Making sure you pay your bill on time each month is great practice for the days when you have mortgage payments, student loans, utilities, etc. It is also a good way to track your spending on miscellaneous college supplies, like books and beer.
Suppose your college student drops the ball with their credit card…
Falling behind on a credit card is no fun and a very difficult lesson. Getting hit with late fees, high interest payments, and hurting your credit is a terrible outcome. However, it might also be the best thing that happens to your child.
Most credit cards for students have limits of $500 to $2000. While this is certainly not chump change, it is an amount that can be paid back with a few extra shifts at the local diner during the summer. By falling behind, your child can learn first hand the misery that is a collection call, or the challenge of getting caught up. It can also open their eyes to the value of a dollar.
For some, the hard way is the only way to learn these finance lessons. The best way to do this for a college student is on a low limit credit card. The worst way to do this is to rack up a bunch of student loans. Deciding that your college is too expensive, or that too much money is being spent on rent, or that the interest rate on your student loan is too high is something that should happen before school, or at the very least, before graduation.
Many people don’t realize the real effects of compounding interest and the difficulty of paying back debt until it is too late. Learning this tough lesson on a $500 credit card bill is much better than learning it on a $150,000 education.
The bottom line
If you trust your child to be responsible enough to sign up for thousands of dollars in student loans, then they ought to be responsible enough to handle a credit card. For those that can’t handle even a little financial responsibility, credit card problems could the best medicine. Ultimately, if you really want to protect your child from financial mishaps, a credit card is a much lower risk way to learn some lessons.