Teach college-bound teens how to handle finances

Posted on August 28, 2007
Filed Under Advice, Students Credit Cards | Leave a Comment

Young people heading off to college for the first time this fall will face a host of new challenges and opportunities, including the joys and temptations of handling credit cards.

In recent years, credit card companies have increasingly been soliciting college students. According to the Nellie Mae student loan organization, the average freshman with no debt in September will build up $1,500 in credit card debt by May.

“For many of them, this is their first opportunity to manage their own money,” said Randy L. Harrison, a partner and certified public accountant with Meyers, Harrison & Pia LLC in New Haven. “Students are more susceptible to making financial mistakes, due to lack of experience.”

Harrison said it’s vital for parents to sit down with college-bound teens and talk about credit.

“Credit cards are easy to abuse and credit problems are hard to fix,” Harrison said. “The cost of abusing credit cards in college can stay with these students for a lot longer than the credit card stays with them.”

Harrison said parents should tell their children that credit cards are a convenience, not a financing tool. “Children should learn not to buy something if they can’t afford to pay for it. Don’t put it on your card unless you have the money in the bank,” he said.

LowCards.com, a consumer-oriented Web site, has issued a set of guidelines for college students who obtain credit cards.

“Once they get to school, they are going to be surrounded by credit card offers and if they don’t understand the process and the dangers, they can easily make costly mistakes with their credit,” said Bill Hardekopf, CEO of LowCards.com.

Recent changes in credit reporting standards mean that adding a child to the parent’s credit card no longer will build the child’s credit score, Hardekopf said. So to start building a credit record, students will have to get their own credit cards.

Parents should start the process by going over their own credit card bills with their children, he said. Parents should explain finance charges, grace periods and minimum payments. “Explain how much extra you must pay each year in interest charges if you only pay the minimum payment,” he said.

Parents should also make sure any credit card obtained by their child has a low credit limit, preferably around $500, he added.

Here are some suggestions from LowCards.com for college students using credit cards:

• Get only one card and pay it off each month. Stick with this card to build a long credit history.

• Only use credit cards for emergencies, not for gas, food or clothing.

• Pay off the balance each month. If you only pay the minimum due on a $1,500 balance, you will pay more than $3,400 in interest alone and it will take 26 years to pay off, assuming an 18 percent interest rate and a 2 percent minimum payment.

• Avoid department store credit cards. Although discounts at a favorite store sound nice, store cards charge the highest interest rates.

• Sign up for online alerts from the card issuer. They now notify you when you are close to your limit and before your payment is due.

• Avoid using credit cards for cash advances. The rates and fees are extremely high.

Know your credit limit and look at it each month.

• Pay your bill a week before the date it is due. If you exceed the credit limit or have one late payment, the interest rate could jump to nearly 30 percent.

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