When you child graduates from high school, that marks the beginning of several changes in their lives. It all stems from the fact that they will be moving away to college and will now learn how to fend for themselves.
One of the things that you need to teach you kid involves financial management. You want to make sure that they will learn how to keep their finances in order because it will keep them from suffering debt when they get older. In particular, you need to introduce them to the concept of credit cards and its use.
A recent Fico study shows that the recent recession brought credit card fear into a lot of Millennials. They have chosen to put themselves in student debt rather than to opt for credit cards. While the former has a better potential to be a good debt, you need to understand that sometime in the life of your child, they will face credit cards. Instead of shielding them from this debt danger, you probably want to give them the lesson yourself instead of letting them find out about the pitfalls the hard way.
Lessons that you have to teach your college kid about credit cards
Most parents today are cautious about giving credit cards to their kids. However, given the fact that they are away from you, they need the financial security that credit cards can bring. In the event of an emergency, they can use these cards to help them out of tight spots. For all the evils of credit cards, you cannot diminish the fact that it does give you access to quick cash when you need it the most.
So instead of banning it in your child’s life or letting them use debit cards that has all the finance charges, why not just teach your kids the proper way of using credit cards? Here are some of the important lessons that you need to impart.
It is still a debt that has to be paid back.
Sometimes, our kids think that credit card purchases are made with our money. While that is technically true, it will only happen after you pay back the debt. Let them know that any purchase they make through their card is the money of the creditor. It has to be paid back – otherwise, penalties will be given. When that happens, the debt will grow and may spiral out of control if they are not careful.
Before using, make sure it is part of the budget.
Another important lesson that your child must learn is budgeting. Teach your child how to budget and make sure that any allowance that they will receive will last until the next one arrives. If they have to use their card, it has to be reflected on their budget. For instance, let us assume that they have a food budget of $300 per month. If they opted to charge their dinner with friends one night, the payment for that would have to be taken from the food budget. The same is true if they use their card in the grocery or something similar. It has to be paid immediately using the budget that they have. The only time that they can use the card outside of the budget is during emergencies. Make sure you define what an emergency is.
Pay within the grace period.
Teaching your kids about interest rates can be a complicated discussion but it is something that you have to make them understand. Specifically, you need to teach them about the grace period. This is the window between the purchase date and the due date of the billing statement where it is included. If your kid wants to keep the interest from ruining their budget, they have to learn how to pay within this date.
There may be other lessons but these should constitute the important ones. These will keep your child from incurring unnecessary credit card debt.
How important is a credit card in the financial life of your child?
While we all admire the decision of Millennials to stay away from credit cards, it does pose a couple of disadvantages. Let us discuss them one by one.
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Builds up credit history. Credit scores are important because it is needed to open opportunities like financial assistance, employment and even a decent rental place. However, to have a credit score, you need a credit history. To have the latter, you need a credit account. But the thing is, you cannot get a credit account if you do not have a credit history. It is one of those complex things that can be helped by credit cards. There are credit cards for first timers that will not really care about the lack of credit history and these are perfect to start building the records of your child.
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Protects the cash from theft. When a cash is stolen, it is often hard to recover that. But when your child loses their card, you can simply have them cut off and the thief will be unable to use it anymore.
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Eliminates false charges. The billing statement of the credit card will detail the expenses of the holder. This will help your child monitor their expenses – and you as well. That will help you guide your college student towards smart spending habits.
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Enables the holder to participate in certain transactions. Car rentals are only one of the transactions that will require a credit card. This is one thing that your child cannot do.
There are more reasons why you should teach your child the proper way of using credit cards. Instead of keeping them from it, you can teach them a lot more if you expose them to the temptation. As long as you are there to guide them and you have instilled the right values in them, they should be alright.
Here is a video that gives tips on how you can get a credit card for your college student.