College will teach your child many things. Do you want to add financial lessons to the mix? Deciding whether to send your kid off to school with a credit card in their wallet can be quite a challenge.
To help you make up your mind, we'll go over the good and bad aspects of a student having a credit card, and offer tips for working around the pitfalls.
Credit Cards Can Help Build Credit
It's important for students to build credit. "Your credit score will play a vital role throughout your life and college is a great time to start building it up," says Leslie Tayne, an attorney specializing in debt and financial issues with the Tayne Law Group. "According to FICO, 15% of your credit score is based on the length of your credit history. The earlier you start developing credit, the more you can reap the rewards."
Plus, having a good credit score when you graduate from college sets you up nicely for self-sufficiency. "It allows you to get an apartment or house, determines if a lender will approve you for a loan or line of credit and it can even help you land a job! Building your credit is not something you want to put off," Tayne says.
Know Your Options
If you go the credit card route, note that the Credit CARD Act of 2009 requires credit card applicants under age 21 to either have an independent means of repaying the debt or a co-signer who's at least 21 years old. This law also prohibits credit card issuers from sending preapproved credit card offers to underage consumers.
Be sure to shop around and search for the best credit card that suits your child's lifestyle. "There are a ton of student credit cards that offer low-interest rates or 0%," Tayne says. "With a student credit card, you will have a lower limit to ensure you don't go over your credit line. The majority of the time students will need to have a steady source of income and be an attendee of a school." Card benefits may include rewards to scholars if they receive good grades.
SEE ALSO: 8 Best Credit Cards for College Students
Other credit cards may require a co-signer, as mentioned above — and that's likely to be you. Another option is to add your child to your card as an authorized user.
Secured credit cards are also an easy way for someone to build their credit from scratch. A secured card requires an upfront cash deposit, which equals to a line of credit and acts as collateral.
Watch Out for the Pitfalls
Truth is, it's fairly easy for a freshman to get a credit card. "The credit card companies know that college students statistically have a high forward earnings potential," says Lyn Alden, founder of Lyn Alden Investment Strategy. "As long as the student knows to pay off his or her bill every month, and not to spend inappropriately, it helps build credit with zero downsides.
"The biggest risk is if the student buys things frivolously, doesn't pay their bills on time, and racks up debt and interest," she continues. "This can backfire, and result in wasted money and a damaged credit score."
Mark Kantrowitz, publisher and vice president of strategy for Cappex.com, a college financing website, cautions that most college students already graduate with a lot of student loan debt. "The last thing they need is to also graduate with a lot of credit card debt," he says. "Credit card debt tends to charge higher interest rates than student loans and lacks many of the protections provided by student loans.
"Another problem with credit cards is that paying with plastic feels the same whether you're spending $5 or $500, so it is too easy to spend money," he adds.
Indeed, this is not free money. "Your child must realize that they will have to pay off their credit card and comprehend the income to expense ratio," Tayne says. "Advise him/her to resist using cards to support their social life. It can be convenient to pay with plastic for a night out or a Netflix subscription, but you risk living outside of your means.
"You don't want to be in a situation in which you can't pay your bills at the end of the month," she notes. "Missing payments or paying just the minimum can result in being hit with late fees and hefty interest charges."
Parents should also think twice about co-signing. Kristin McGrath, editor at CreditCardForum.com, says, "If you're giving your child a leg up via a co-signed account or an authorized-user card, you've just added another worry to your plate while he or she is away at college.
"Because the card's in your name, too, your credit will get dragged down if payments are late," McGrath says. "If you're paying all the bills, you also run the risk of teaching your kid the wrong lesson — that credit cards are free money and that everything she wants is just a swipe away."
Work Around the Challenges
However, the hurdles are worth jumping over if your child ends up with a solid foundation for using and managing credit.
Kantrowitz recommends students never carry a balance on a credit card. "If you carry a balance, you are living beyond your means," he says. "If you have a tendency to spend more than you can afford to repay, switch to paying with cash. When you run out of cash, you have to stop spending. Also, the largest denomination should be $20, so you feel like you're spending money when you're buying something expensive."
Another tip is to get a credit card with no annual fee. And make sure the card allows at least a 25-day grace period for payment. Sign up for automatic payment of the monthly credit card bill by arranging to have the amount transferred from your bank account to the credit card.
In terms of specific cards, "Look at rewards cards, like Discover and the Citi Double Cash Back card," Kantrowitz says. "This can save you money."
Tayne offers a final tip: "Parents should teach their young adults that it's vital to check their monthly statements," she says. "The point of doing this is so you are always in the know of your charges. Additionally, it can prevent you from being a victim of fraud or identity theft."
Readers, what do you think are the biggest pros and cons of getting a credit card for a student? Did you have a credit card when you were in college, and if so, how did that work out? Let us know in the comments below!