Just before kids turn 18 and prepare to leave home, credit card companies swoop in. It’s not fair, particularly for those who don’t have a good grasp on money and budget, who haven’t been carefully putting quarters into jars, dollars into envelopes and checks into the bank since they were young children, and who haven’t been practicing as authorized users on a parent’s card as young adults. One current mailer begins “a credit card is safer than carrying cash, more acceptable than a personal check, and a lifesaver on a college campus.” The annual purchase percentage rate for that lifesaver is 29.9 percent, with a $25 annual fee after the first year, and a $35 late pay fee.
Here’s one view: No credit
Information Security specialist John Bandy has taught Crown Financial Ministries, Dave Ramsey Financial Peace University and The Legacy Journey financial courses for more than 10 years and advocates living on cash. “I do not recommend any young adult getting or using a credit card. It is not necessary. Yes, insurance rates, deposits on housing and some mortgage loans are based on FICO (credit) scores, but, in taking on debt, you assume you will have the same or greater resources to repay the credit card bill as you do now, and that is not always the case.” Life is unpredictable and it’s not worth the risk.
“I have no problem with a debit card. It is safer than carrying cash, the money comes out of the account immediately, it can be used most everywhere a credit card can be used, and the transaction can even be treated like a credit card transaction if the cardholder requests this.”
Bandy also teaches the importance of balancing checking account statements every month to track how much money you have and what you can do with it, and monthly budgeting to “give every dollar a name and tell it where to go before the month begins,” Bandy says, quoting Dave Ramsey. Not only do these skills keep students out of debt, they encourage long-term saving, says Bandy who recommends visiting http://tinyurl.com/378eypc to see the earning power of interest when you start saving early.
Another view: Yes credit
Lee Boblitt and C. C. Tietjen St. Magnus teach college success skills at Lincoln Land Community College. Both advocate using credit as an informed consumer. However, of the 50 students Boblitt surveyed at the beginning of his course this fall, approximately half had one or more credit cards but only one student knew the credit limit and interest rate. “Students who don’t pay attention to card limits, interest rates, balances, due dates and penalties can so damage their FICO score that they suffer the consequences for years after college,” Tietjen says.
Nevertheless, both professors encourage responsible use of credit. This takes at least 12 months of conscientious use on small purchases with no late or missed payment dings. “It’s a mathematical model,” Tietjen says. “A $50 versus $50,000 payback doesn’t matter. It just needs to be on time, in full, for more than 12 months. You can establish a good credit score even with very low student income.”
To get started, Tietjen recommends a secured credit card. The student deposits a few hundred dollars into the bank, charges against that for purchases, and repays it each month. According to Tietjen, this form of revolving credit is low risk, avoids having a parent cosign the credit account, and provides the fastest way to build a credit score.
In the middle: Moderation
Certified Financial Planner Brian Barstead used credit as the classic safety net for his son. “When my son went to Illinois State University, I went to the bank where he had a checking account with branches in Springfield and Normal so I could deposit money in it for his debit card/cash needs. We also opened a credit card with a small limit on it so, if he couldn’t control himself, my wife and I wouldn’t be wiped out. The statements came to the house and he didn’t use the card that often other than for books, etc.”
It has worked well. “When our son graduated and started his first job, he was able to open his own line of credit and I didn’t have to sign off on it, based on his credit history and his banking relationship and proof that he had a job to pay his own bills.”
“I think the biggest thing, with a credit card, like other things in parenting,” Barstead concludes, “is to establish agreed upon boundaries on the credit limit so, if you unleash the power of a credit card into the wallet of an uninitiated young person, you won’t end up getting in trouble yourself. Also, establish some rules on when and for what purpose it can be used, and make sure that, from an early age, you teach your children what a credit card is and how it works. When they are old enough to understand it, buy something at a store, and then show them when the bill comes how you have to pay for that purchase. It seems rather simple, but kids sometimes can confuse their parents for the ATM.
“If your child decides to spend money on other things with the credit card, he or she needs to ask permission. And, by all means, if you see something on the monthly statement that you don’t understand, be prepared to confirm it with the child. Let him or her know you’re observant and make sure there are no unauthorized charges, to protect you and your child from hackers and identity thieves.”
For additional reading:
http://tinyurl.com/mer9s9n
http://tinyurl.com/mcybaqz
College mom DiAnne Crown of Springfield has been reading starter credit card offers for six months.
This article appears in Capital City Parent October 2013.
