Credit Card Tips for College Students
If it is time to help your son or daughter pack for college, it is also time to talk with them about managing their finances, especially credit cards. In our plastic easy access for credit card payments and easy-to-get credit card offers. Parents must help their older teenagers find the right card, and teach them the correct way to use credit.
According to Nellie Mae, an incoming freshman who has no debt in September will have approximately $1500 in credit card debt by May.
"Handling credit cards is an important lesson parents should teach before their students go to college. 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," says Bill Hardekopf, CEO of LowCards.com.
"Parents try to prepare their kids to make good decisions when they leave home and are on their own. Staying out of debt and building a good credit score should be one of the most important lessons."
Unfortunately, recent changes by FICO have eliminated the option of simply adding your child to your credit card account to help them get their start.
"Parents need to know that they if they just add a their child as an authorized user on their credit card, it no longer helps build the authorized user's credit score. Fair Isaac, the company that created the FICO credit score, recently announced that its new scoring model will no longer factor the scores of authorized users into its
FICO accounts," says Hardekopf.
Authorized users on credit cards are those who are not responsible for paying the balances but are approved to make purchases with the cards. Often, authorized users are family members of a cardholder, such as a college student, who have little or no credit of their own. This change means that college students should apply for a credit card in their own name while they are in college because this will be the easiest time in their lives to get a credit card. If they wait until after college, they will probably have to start with a secured card or store card to begin building credit.
Credit card approval for college students is easier because credit card issuers evaluate each applicant based on risk and the likelihood of repayment. They know that college students are an acceptable risk because they have parents who will probably pay off their debt if there is a problem. However, unlike parents, credit card issuers are not compassionate, forgiving and understanding if the cardholder gets into debt trouble. There are consequences such as fees, rate increases, and most importantly, damage to their new credit score.
"Parents should start by sitting down with their kids and going over their own credit card bill. Explain about finance charges, grace periods and minimum payments. Explain about rotating balances and how much extra you will pay each year in interest charges if you only pay the minimum payment," says Hardekopf. "It is also a good idea to show them a copy of your credit report and the effect of credit cards and other debt on their credit score and future financial options.
"There are a lot of credit cards available and the choices can be confusing. Help your student shop around for the best credit card. Studies show that most college students apply for a card based on a direct mail offer. These cards often sound good in the promotion, but hide the true terms and fees, making it is easy for a first-time applicant to get the wrong card," says Hardekopf.
"Parents can help set some controls by making sure their new cardholder has a low credit limit of around $500 and request that they are not allowed to charge anything over that. Also make sure they sign up for alerts for payment reminders and approaching the credit limit."
Suggestions 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/groceries, or clothes. machines and fast food restaurants. It is too easy to use the card for a quick meal or impulse purchase without considering the premium a high interest rate will add.
* Pay off the balance each month. 44% of undergraduates say they make more than the minimum payment but generally carry forward a balance (Nellie Mae). If they only pay the minimum on a $1500 balance from their freshman year, they will pay over $3,400 in interest and it will take 26 years to pay off (assuming 18% interest rate and 2% minimum
payment).
* Avoid department store credit cards, especially at a time when it will be easy to get a standard MasterCard, Visa or American Express. Although a discount to a favorite store sounds like a good idea, store cards have the highest rates available.
* 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. The credit limit may be as low as $500.
* Pay your bill a week before the date it is due. Default rates also apply to college students. If you exceed the credit limit or have one late payment, the interest rate could jump to approximately 30%.
According to Nellie Mae, an incoming freshman who has no debt in September will have approximately $1500 in credit card debt by May.
"Handling credit cards is an important lesson parents should teach before their students go to college. 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," says Bill Hardekopf, CEO of LowCards.com.
"Parents try to prepare their kids to make good decisions when they leave home and are on their own. Staying out of debt and building a good credit score should be one of the most important lessons."
Unfortunately, recent changes by FICO have eliminated the option of simply adding your child to your credit card account to help them get their start.
"Parents need to know that they if they just add a their child as an authorized user on their credit card, it no longer helps build the authorized user's credit score. Fair Isaac, the company that created the FICO credit score, recently announced that its new scoring model will no longer factor the scores of authorized users into its
FICO accounts," says Hardekopf.
Authorized users on credit cards are those who are not responsible for paying the balances but are approved to make purchases with the cards. Often, authorized users are family members of a cardholder, such as a college student, who have little or no credit of their own. This change means that college students should apply for a credit card in their own name while they are in college because this will be the easiest time in their lives to get a credit card. If they wait until after college, they will probably have to start with a secured card or store card to begin building credit.
Credit card approval for college students is easier because credit card issuers evaluate each applicant based on risk and the likelihood of repayment. They know that college students are an acceptable risk because they have parents who will probably pay off their debt if there is a problem. However, unlike parents, credit card issuers are not compassionate, forgiving and understanding if the cardholder gets into debt trouble. There are consequences such as fees, rate increases, and most importantly, damage to their new credit score.
"Parents should start by sitting down with their kids and going over their own credit card bill. Explain about finance charges, grace periods and minimum payments. Explain about rotating balances and how much extra you will pay each year in interest charges if you only pay the minimum payment," says Hardekopf. "It is also a good idea to show them a copy of your credit report and the effect of credit cards and other debt on their credit score and future financial options.
"There are a lot of credit cards available and the choices can be confusing. Help your student shop around for the best credit card. Studies show that most college students apply for a card based on a direct mail offer. These cards often sound good in the promotion, but hide the true terms and fees, making it is easy for a first-time applicant to get the wrong card," says Hardekopf.
"Parents can help set some controls by making sure their new cardholder has a low credit limit of around $500 and request that they are not allowed to charge anything over that. Also make sure they sign up for alerts for payment reminders and approaching the credit limit."
Suggestions 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/groceries, or clothes. machines and fast food restaurants. It is too easy to use the card for a quick meal or impulse purchase without considering the premium a high interest rate will add.
* Pay off the balance each month. 44% of undergraduates say they make more than the minimum payment but generally carry forward a balance (Nellie Mae). If they only pay the minimum on a $1500 balance from their freshman year, they will pay over $3,400 in interest and it will take 26 years to pay off (assuming 18% interest rate and 2% minimum
payment).
* Avoid department store credit cards, especially at a time when it will be easy to get a standard MasterCard, Visa or American Express. Although a discount to a favorite store sounds like a good idea, store cards have the highest rates available.
* 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. The credit limit may be as low as $500.
* Pay your bill a week before the date it is due. Default rates also apply to college students. If you exceed the credit limit or have one late payment, the interest rate could jump to approximately 30%.
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