As your son or daughter arrives on campus, prepare your student for the avalanche of credit card offers soon to fill their mailbox. If they don't have a credit card and are considering signing up, read on. Credit can be very slippery if not used properly, yet careful charging and paying helps establish a good credit reputation.
What Is Credit?
It is very important that your son or daughter knows what credit is before they arrive at school. Credit is a privilege and a convenience. Credit lets you charge a meal on a credit card, pay for a haircut or oil change, take out a loan to buy a car, or pay for schooling. Credit allows you to make a purchase without ready cash.
A credit card enables your son or daughter to buy things now and pay for them later. You get credit by promising to pay in the future for something you receive in the present. Credit usually costs something, and what is borrowed must be paid back.
Why does my son or daughter need credit?
Credit gives a number of benefits you don't get when paying with cash or checks:
- Emergency protection. Credit cards are the ultimate financial security blanket. They can get you through nearly any emergency situation.
- Security. If you lose cash, it can be used by anyone. If you lose a credit card and report the loss to the card's issuer before it is used, the issuer cannot hold you responsible for any unauthorized charges.
- Convenient, hassle-free shopping. When you use a credit card to make a purchase, you don't have to carry a lot of cash, pay by check, or present additional identification. A credit card also simplifies and speeds up catalog ordering and currently is virtually the only way to make Internet purchases.
- Travel expenses. You'll find that a credit card is almost essential for renting a car, purchasing an airplane ticket, or booking a hotel room. Whether you're across town or on another continent, a credit card is the universal guarantee of your good financial standing. And if you need cash, you can get it at ATMs or banks around the world that accept your credit card.
When your son or daughter applies for credit, the lender reviews their credit report before approving the application. The three major credit reporting agencies are Equifax, Experian, and TransUnion. These agencies, which are also called "credit bureaus," collect and report information about consumers' financial habits and put the information into a credit report. Each agency's report contains the same basic information: name; Social Security number; current and previous addresses; details about loans and how they've been handled; public-record information, such as bankruptcies, court judgments, or liens; and a list of companies that have reviewed the credit report.
Why is it important to establish a good credit history?
Establishing a good credit history is an important part of your son or daughter's personal and financial future. It can help open doors for them or keep them locked.
A variety of people and businesses make decisions affecting your son or daughter's future that are based on their credit history. Banks and other lenders consider your credit report when reviewing applications for mortgages, revolving lines of credit, or other loans. Landlords sometimes use credit reports to decide among rental applicants. Additionally, a potential employer may even assess an applicant's credit report before extending a job offer.
Your son or daughter's credit report may also be reviewed when they apply for auto insurance or homeowner's insurance, or even a cell phone. That's why it is so important to establish a positive credit history.
How does your son or daughter establish a good credit history?
In short, it's by consistently paying your bills on time. Remember, to establish a good credit rating, you should always pay at least the minimum amount due every month by the due date.
Establishing Credit
Check out this section for tips and advice on choosing and qualifying for a student credit card, building your credit history, and ways in which your son or daughter are responsible for wise credit use.
Choosing a credit card
Today's consumers are presented with a wide array of credit card choices-cards with low annual percentage rates, cards with no annual fees, rebate cards, gold cards, platinum cards, and so on.
So how do you help chose the right card for your son or daughter? Before selecting a card, be sure you know which credit terms and conditions will apply to the account. The Truth in Lending Act is a federal law that promotes the informed use of consumer credit by requiring disclosures about its terms and cost, using specific terminology. In short, the Truth in Lending Act allows the consumer to "shop around.
Qualifying for a credit card
If your son or daughter is a full-time student, make sure to include that information on your credit application. Creditors often assign full-time students lower initial credit lines to start their credit files. Before your son or daughter submits a credit application, have them get a copy of their credit history to make sure it's correct. To order a copy of their credit report your son or daughter should visit www.annualcreditreport.com. Annualcreditreport.com gives a free credit report once every 12 months from each of the nationwide consumer credit reporting companies: Equifax, Experian, and TransUnion.
Building your credit history
How does your son or daughter establish a credit history? Even if they've never made a major purchase, there are ways for them to start building a good credit history:
1. Open a checking account or savings account, or acquire a debit card. These do not create your credit file, but their existence will indicate that you have money and show something about how you manage it.
2. Apply for a major credit card (such as a MasterCardŽ or VisaŽ), and use it responsibly. Pay your credit card bills on time.
3. If they don't qualify for credit on the basis of your own credit file, ask someone with an established credit history (like a parent) to co-sign your application.
Being responsible
Because credit cards make it easy to purchase things now and pay later, it's easy to lose track of how much you've spent. Make sure your son or daughter pays all their bills on time, and they only get the credit cards they need-don't get a card just because the issuer is giving away a cool gift.
To establish and maintain good credit, pay at least the minimum amount due on each account every month, and pay on time. Allow five to seven business days for payments made by mail. Make sure they only use the credit card for needs (emergency) not wants (pizza party for the whole dorm floor).
Make sure they understand to use their credit card wisely, and they'll have a very beneficial financial tool. If they use their credit card unwisely, they'll run up credit card debt they can't afford. Nothing is easier than charging small things here and there, only to find yourself with a large bill you can't pay.
Credit Card Tips for Students
1. Shop for the credit card that is right for you, not the one that comes with a free T-shirt. The wrong credit card can be like a bad blind date. So don't take the first offer that comes around. Check it out and be choosy! Don't be tempted by freebies for something as important as establishing credit.
2. Treat your credit card as a plastic loan. Buying pizza for the dorm using your credit card is fine as long as your son or daughter has a plan to pay off the balance at the end of the month. No plan and they are paying mega-interest on that meal long after they can remember who helped eat it. Having credit does not mean they have more money to spend. Your son or daughter just has a different way to spend it!
3. You can't always get what you want. The latest sneakers or concert tickets may seem like needs at the time, but they aren't. Keep in mind that carrying a balance on your credit card costs your son or daughter money each month in interest charges. Therefore the jeans they buy on sale in September, that are not paid for until the following September, will have ended up costing them much more than the original sale price.
4. Keep track of purchases, they add up. Sometimes the ease of paying with a credit card can lull you into forgetting what you have already bought on credit that month. If your son or daughter plans to use a credit card for daily purchases, have them keep track of them using a checkbook register. Write down the amounts just as you would if you had written checks and subtract them from the money you will have available to pay the bill when it comes in. If the register tally shows that you don't have any more money, or you don't have a plan for how you will pay off the purchase, stop charging!
5. Go slowly. Get one card with a low limit and use it responsibly before you even consider getting another. You don't need a whole bunch of cards to build credit. One or two low-limit cards are more than enough. What matters is that your son or daughter pays their bills on time every single month. Their goal is to establish a solid payment history. Graduating with a couple of years of on-time credit card payments should do the trick.
Credit Card vs. Debit Card
Deciding when to use your debit card and when to use your credit card isn't a frivolous decision. A credit card is a "buy-now, pay-later" tool. A debit card is a "buy-now, pay-now" tool. Both cards can play major roles in your money-management plan.
A debit card is linked to your checking and/or savings accounts, in banking terms, "deposit accounts". When your son or daughter uses a debit card, money is subtracted from your deposit account, generally a checking account. In contrast, a credit card is an unsecured loan that a financial institution provides to you as a payment convenience. Using a credit card means that your son or daughter intends to repay the amount - plus interest if you do not repay the balance in full each month.
What can I as a Parent do?
Too many parents don't talk to their children about money. The best thing that parents can do is to talk to your children about handling debt wisely before they head off to campus. Agree to the rules and warn them of the pitfalls of improper use of credit.
Here's a start-them-slow solution: Parents may ask their card issuer to authorize an additional card for their son or daughter. There are also cards available to parents who can link a child's card to their accounts, or where they can keep refilling the teen's or student's accounts as they go along. It's a way to keep up with what's going on and limit spending but still provide the freedom and convenience of a card.
If your student is like most, they will need a credit card for many reasons. When is its use allowed? Only in an emergency? Discuss what makes an emergency (Here's a hint: It isn't Friday night pizza.). Credit Cards can be a great tool for responsible students to build credit, but can also turn into a lot of additional debt during their college years if they are not informed of the above section.
