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College students and credit cards are sometimes a scary mix but as long as you set the rules early on, you don’t really have to worry. Depriving your child of this purchasing power will not really teach him anything. One way or the other, they will get a hold of a credit card and without proper supervision, they can end up in so much debt.
If you think that a credit card is such a threat in your child’s financial condition, you may want to introduce it to them yourself and make sure that they learn how to use it properly. The best time to start the credit card education is when they go to college it is the time when they have to make their own financial decisions yet remain under your control. You can maintain a respectful distance as they learn to deal with the day to day expenses but you still have the right to step in when they blunder into mistakes.
Rule 1: Choosing the right credit account for students
Educating your child on the right credit card use begins with the choice of card. This is the first rule that you want to teach your child - choose the right credit card based on their spending lifestyle. You can use online comparison sites like CreditCards.com to teach your kid how to make the right choice when it comes to new credit card accounts.
Here are some of the important things that you may want to point out to your child.
Interest rate. While choosing the low interest rate card is good, you need to tell your kid that it will not always stay that way. Credit card companies can change their rates without reason - usually the change is to increase the rate. They will just give you a 45-day notice that they will make the change and that is sometimes not enough time to pay off your balance. That will leave the card holder with a higher interest amount that will be added to their current balance.
Intro APR. Most new credit card accounts are offered zero or very low interest rates. Explain to your child that this is only for a short period of time. Teach them to read the fine prints so they are aware of the promo period and when the real interest rate will kick in.
Credit score requirement. This is the right time to explain the basic lessons about credit reports and how they affect the financial opportunities of a consumer. Explain what good, fair and bad credit means. Teach them they their credit card use can make or break their credit report.
Rewards system. This is when the spending lifestyle of your child will come into play. Help them find the right card that will support how they make purchases. Explain how the rewards system can be maximized.
Other fees and charges. Lastly, explain the fees that are associated with the card. These can be the annual fees and other finance charges for cash advances, etc.
4 other rules to discuss before giving the plastic card to your kid
Apart from teaching your kid how to choose a card, there are 4 more rules that you need to teach your kid. As a parent, you want to make sure that you can protect your child from student debt problems. While there is very little that you can do with student loans, there is a lot that you can help with credit card debt. Regardless if your child will be carrying a card under your name or if it is their own, here are the rules that you need to set and implement.
Credit card use.
Define when the credit card is to be used. Depending on the cash allowance that you will send your child, you may want to limit the credit card use for emergencies. These can be health related or unexpected school expenses. Be as detailed as possible so that your college student do not have to make their own assumptions.
It is also important to set a limit. If you will allow your child to finance their entertainment expenses through these cards, make sure you clearly define how much they are allowed to spend. Set a clear budget that you will pay for to fund their clothes, food allowance, movie expenses, etc.
Some parents are willing to pay for the whole amount on the credit card but some want to teach their kids further responsibility. They encourage their kids to pay for half of the entertainment expenses that they will spend. That will prompt them to make smarter choices with their expenses if they are forced to pay for a part of it.
Credit card consequences.
Lastly, teach your child about the consequences of their credit card misuse. Things like late payments, overspending, reaching the credit limit - all of these have their respective consequences. It is usually in the form of fees and charges. Make sure your child understands all of these.
Although your child is clearly growing and will not like being controlled, they need to follow these rules to help them understand that credit card use is not something that they should abuse. These lessons will keep them from putting themselves under too much debt and thus compromise their future income.