Ray’s Take Too many of us are sending our kids to college with no understanding of how to handle – or better yet avoid – debt. A recent survey revealed that while 70 percent of undergrads had credit cards, fewer than 10 percent paid them off in full each month. Even worse, a mere 14 percent knew what their interest rate was!
Consider that the average credit card debt for college students is over $3,000, and that’s on top of student loans that average more than $30,000. That’s a significant financial headwind for these kids before they even start their independent lives. A tougher job market makes this handicap even more difficult.
The recent economic downturn has reduced credit card use by college kids somewhat – they’re turning more to debit cards. However, they still need to understand how their cards – credit or debit – work, what the interest rates are and what financial penalties they may incur for overdrawing/spending or late/missed payments. They need to learn these things before credit card offers arrive at their college dorm rooms.
Most kids see these transactions as a quick swipe of the card and you leave with whatever you want. They rarely see the bill paying part of the transaction. While your kids are still in high school, explain the intricacies of credit and debit cards to them and consider giving them a card-wielding experience you can supervise. There are secured credit cards and co-signer cards that involve you in the credit decisions – for better or worse. This gives you an opportunity to supervise the experience and will help your kid build the credit rating needed to rent an apartment or buy a car later. When you know your credit is on the line as well as your child’s, that’s a powerful incentive to make sure your kid understands the repercussions of every credit purchase they make, both when the bill comes due and in the long term.
Dana’s Take The come-ons for credit cards can be really sweet – especially to the ears of a cash-strapped college student: no annual fee the first year, no interest for the first six months or more, maybe even an account credit just for signing up and using that card for the first time.
Which college student wouldn’t want to be able to use someone else’s money in order to buy that emergency pizza or concert tickets? With no interest, there’s no incentive to pay the balance in full. Optimistic college students believe the money will come in later to cover everything. Except it doesn’t. Sooner than expected, that credit card interest-free honeymoon expires, and your college student is facing horrendous interest rates. So when you’re teaching them about the proper use of credit cards, make sure they’re well aware of the dangerous seduction of credit card companies – and avoid them like the plague.
Ray Brandon is a certified financial planner and CEO of Brandon Financial Planning (www.brandonplanning.com). His wife, Dana, has a bachelor’s degree in finance and is a licensed clinical social worker.