How to talk to your student about credit cards

Ten or twenty years ago, credit cards weren’t much of a problem for most students. But these days, students not only graduate with massive student loan debt, but also credit card debt. According to Nasdaq, the average student balance in 2013 was $ 499, more than most students can afford in a single month, that’s for sure.

Related: What’s the best plan for paying off student loans?

This is despite the fact that the Credit Cards Act prohibits people under the age of 21 from obtaining a credit card without an adult co-signer or without proof that they have enough income to pay the bills. This means that most students use debit cards instead of credit cards. But, still, more and more students are seeing credit cards as a viable option.

So how should parents talk to their students about credit cards before heading back to campus this fall? Here’s what you need to know about whether or not your student can get a credit card, and how to talk to them about responsible credit card use.

Can University Students Get Credit Cards?

the Credit Cards Act put restrictions on the ability of lenders to give underage users a credit card of their own. On the one hand, it limits advertising on campus and near campus. It also prevents applicants under the age of 21 from getting a card without a co-signer, unless they can prove with certainty that they have the income to make payments on the account.

That said, it’s not impossible for students to get a credit card, especially if they even have a part-time job. And the temptation can be great when expenses or desires arise for which a student has no money on hand. Plus, getting a credit card isn’t a bad idea for a student looking to build a reasonable credit score. The key is to do it wisely and well.

Should College Students Have a Credit Card?

The answer to this question depends on many factors, including:

  • The need to build credit: Students who do not have a student loan will have no other option to build credit unless they co-sign another type of loan, such as a car loan. So, a low limit credit card can be a good option for building credit. And even if they have student loans or other installment loans, using credit cards well is one of the best ways to build a higher credit score.
  • Their overall financial responsibility: Students who already have a hard time not spending money they don’t have or spending too much on things they don’t need may not be in a good position to take responsibility for a card credit. They may have to stay on a budget for a while before venturing into this potentially dangerous territory.
  • Other emergency funding options: A credit card can be a great option for emergency funding if a student gets stranded on the way home or has to get home quickly. Booking a rental car or plane ticket is usually easier and safer with a credit card, so it can be useful in an emergency. There are other options for this, however, including prepaid cards and debit cards tied to an emergency account.
  • Parental supervision: A good reason to get a credit card in advance for a student is that you, as a parent, can link to that account. This could mean being a co-signer with access to the account or adding it as an authorized user to your own account. Either way, you might have access to what they spend and whether they pay off the balance in full each month. It gives students a chance to make small mistakes that won’t have dramatic consequences for their future, and it gives you a chance to tell them about those mistakes.

What other options are available?

Besides a credit card, what other options are available for students who need access to shop online, want to accumulate credit, or both and more? Traditional low limit credit cards in their own name, usually with a co-signer, are an option. But there are others as well, including:

  • An authorized user: If you really want visibility into your students’ credit card habits, you can add them as an authorized user on your own account. It can help your good credit habits boost your child’s credit score, and they don’t even need to have a credit card available to spend. The credit card company will send them a card, but you can still put it away so they can’t use it. However, keep in mind that credit errors on your part could hurt your child’s credit rating. And if you give your child a card to use for certain expenses, they can spend up to your overall credit account limit, and you will be responsible for paying them back. So make sure you have this conversation ahead of time.
  • Secure credit card: If you want your child to take full responsibility for the credit card situation, consider asking them to take out a secure credit card for students. This type of card requires them to deposit a deposit, and their limit is guaranteed against that deposit. This means that if they miss a payment, the money is there for the credit card company to use. It is an option for students to get a card entirely in their name, but also to be limited in the amount of spending they can spend on it.
  • Prepaid debit card: College students can also use prepaid debit cards, which can be a great way to transfer money from your account to theirs if you want to give them pocket money while they’re in school. The best prepaid cards have very low fees and allow you to monitor spending on the account if you are the primary account holder.
  • Ordinary bank account and debit card: If your student is working even for a short while at university, opening a regular checking account with a debit card may also be a good option. This allows your student to manage their own money without spending money they don’t have. The main limitation here is that it may take longer for them to access funds from their homes if you need to get them emergency cash at any time. One way around this is to open their account at the same bank as your bank, which can make same-day transfers possible.

Related: Best chequing accounts and banking options for students

5 talking points about credit cards for parents

Whichever option looks best to you, it’s essential that you have a conversation with your student about credit cards before you send them off to school. Too many students end up bypassing restrictions and taking out a credit card without someone educating them about the responsibilities and potential costs associated with that card.

So before school starts, here are five credit card conversations to have with your student:

  1. Talk about how the APR works and how much it costs. First, make sure your student understands how credit card APR works and how much money it can cost to keep a balance on a credit card. Here is where online calculators like this one can be useful. Imagine scenarios where it might make sense for a teenager or twenties to spend money on a credit card – an emergency, back-to-school groceries, books for the class, etc. Then put that in a calculator and see how long it would take to pay off that imaginary expense and how much they would pay in interest over time. Small exercises like this can go a long way!
  2. See how to make and stick to a budget. If you haven’t yet started talking about budget with your student, now is the time. Look at how much income or savings they will have to live on while in school, then discuss any expenses or potential wants. Work together to find a achievable budget, and explain how they follow and respect the budget during the school year.
  3. Discuss the different types of credit products and other options. The decision whether or not to take out a credit card should be a joint decision. Obviously, it is up to you to decide whether you co-sign or add your student as an authorized user. But also talk to them about other potential options and work together to find the one that best suits your student’s needs and personality.
  4. Talk about how you will handle financial emergencies. During these conversations, be sure to talk about how you would handle potential financial emergencies. What if your student has to return home unexpectedly due to a family emergency? Or if they have car problems at school or unexpected medical bills? Discuss where they can get the money in the blink of an eye if they really need it, and make a plan to get that money to them.
  5. Set up surveillance. College is definitely a time when kids should start to become more independent. But if you foot the bill for their education, you can still insist on some financial oversight. It can look like a co-signer on any credit card account, or it can look like budget check meetings whenever your student is home. Come up with a plan that the two of you can live with. Just knowing that someone is going to check on what they are doing may be enough to help some students make better choices!

Final result

Getting a credit card is certainly not the worst decision for a student. In fact, they can be useful tools for obtaining credit and accessing funds when they need it most. But make sure you have consistent conversations about financial products like credit cards and the liability they demand. And if you decide that a credit card is a good option for your student, check out this starter credit card list to begin.

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