Credit & Money Management

Teach Your Students About Credit

Have a serious heart-to-heart before your kid heads off to college and avoid the frantic "I need money!" e-mails later.

By Joan Goldwasser, Senior Reporter, Kiplinger's Personal Finance

August 14, 2003

In between shopping for dorm room necessities, books and new jeans, take a few minutes to sit down with your college-bound freshman to have a serious heart-to-heart talk about one life-altering decision he or she is bound to face.

No, not drinking, doing drugs or having premarital sex. Most of you probably already covered those topics thoroughly. No, we're talking about credit cards.

The figures are enough to break the ice. You can tell them that the average college student graduates with $3,000 of credit card debt. Then say that if they pay the minimum payment (which is what most recent grads can afford) of $60 a month at interest rate of 14%, it would take nearly 24 years to pay off. And here's the real kicker: They'd wind up paying back more than $6,750 -- more than twice the amount borrowed. For illustration purposes, you can use our True Cost of Paying the Minimum calculator.

Next, be ready for the classic comeback. "But (fill in the blank with friend's name) has a credit card, why can't I?"

That's a tough one, especially when nearly 60% of today's college students carry credit, and more than half of them show up to campus with their own card.

Sure, you might be tempted to reply, "If your friend jumped off the Empire State Building, would you?" But that probably won't get the response you are looking for. Instead extol the benefits of being debt-free, or the high costs of being in debt and the implications of a bad credit record. Most importantly discuss alternatives, and reach a reasonable solution before the temptation of unsupervised credit presents itself.

Opt for a debit card

Teens often equate credit with "free money," and an "emergency" could easily be a pizza delivery because they were late to the cafeteria. A no-fee checking account with a debit card should solve both issues. Teens are less likely to spend money that comes straight out of their account.

Also, discuss how much money you plan to give them each month and how you plan to handle incidentals, such as extracurricular expenses.

Kids should know how to write checks, balance a checkbook and track ATM receipts before they leave home. If they know how to manage money now, they are less likely to get into credit trouble later.

According to Greg McBride of Bankrate.com, free checking accounts are available in every city.

Make sure the bank has an adequate number of ATM machines so your child does not run up charges for using a competitor's machines.

Credit cards and students

If your freshman is determined to carry a credit card, consider a prepaid or secured card. With a secured card, you deposit funds in a savings account and that amount becomes your credit limit.

An 18-year-old does not need permission to obtain a credit card, so you can discourage but cannot forbid applying for one. Just be sure to explain the basics: How interest is calculated; grace periods; penalties for late payments; and the high cost of cash advances. And most importantly, teach them how to shop for a good card. If it is unlikely your student will pay off the balance every month, be sure you persuade them to choose a card with the lowest interest rate, and no annual fee.

Because students are just starting to build their credit histories, they may not qualify for the best deals.

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