You’ve prepared your child for academic success, the SATs, college interviews and even the stocked up on dorm-room essentials for move-in day of freshman year. Yet three years in, while visiting during parents’ weekend, you discover a credit-card bill tucked in among the course books on his desk that makes your blood run cold. How does anyone rack up a balance that large in a few months?
Below are some timely and important financial tips to pass along, before small budgeting missteps lead to long-term debt and bad financial habits:
Not-So-Easy Credit
For many college students, the temptation to open a credit card account can be huge. Signing up for a high-interest-rate card—and falling behind on payments—is a major pitfall that many of them don’t see. A 2009 law tightened the requirements for college students to get a card, changing how and where issuers can promote their cards, and to whom. Prior to the Credit Card Accountability Responsibility and Disclosure (CARD) Act, which took effect in 2010, issuers could market cards and offer giveaways, like T-shirts and free food, right on campus.
Students can still get credit cards—and doing so is an important step toward learning how to use these tools to build and maintain their credit. The simplest way is for parents to add them as authorized users to their own accounts. If they wish to open their own account, they’ll need to find a co-signer, if they’re under the age of 21, or prove they have an independent source of income. Some card issuers have specific cards geared toward college students opening their first account.
Maintaining a Clean Credit Transcript
At that point, the student needs to know some of the basics, as well as the fine-print rules, of credit-card responsibilities. You’d be surprised (or not) by how little young consumers know about the rudimentary mechanics of how credit cards work.
Best to start with consequences, like what happens if they’re late or miss a payment, triggering high fees, higher interest rates, and a ding to their still-delicate credit score and report. In fact, a late payment can stay on their credit report for up to seven years1, leaving a mark well past graduation—much like a failed class during freshman year.
And then there’s the cautionary tale of credit card debt, which can take years to pay off. According to a U.S. News & World Report(opens in a new tab) survey, 46% of U.S. college students say they have credit card debt with 27% saying their credit card debt exceeds $2,000.2 Most students would just shrug that off, but that’s because no one has told them that a $2,000 credit card balance with a typical annual rate of 24% (according to Forbes(opens in a new tab)) and a monthly minimum payment of $100 would take more than two years to pay off.3 The interest alone on this debt would be $579 by the end of those two years. Larger amounts at different payment rates and durations can yield even more sobering costs. (Online credit card interest calculators can help quantify the long-lasting effects of carrying even a little card debt.)
Learning Good Money Habits
Once you’ve instilled a little fear, don’t forget to communicate the positive aspects of signing up for a credit card. For one, your child establishes a credit history that, if handled properly, will be a huge boon once they graduate—from credit checks for their first apartment to getting financing for a car- or home-loan.
Managing a credit card account continuously can also teach important spending and budgeting lessons, not the least of which is how to spend within their means. Making timely monthly payments within budgetary bounds can help build discipline, while cutting down on outsized impulse spending, as they come to understand the difference between a need and a want through the impact to their budget at the end of the month. That can be particularly useful for those students who will need to start paying back student loans post-graduation.
To be sure, advice on good money habits may elicit some youthful eye-rolling, but having an open conversation about how to responsibly handle credit, as well as spending and budgeting, can have a lasting impact And leave your young adults with a stronger financial foundation as they transition out of school.
Morgan Stanley’s Spending and Budgeting Tool can make it easier for you to see your complete financial picture. Ask your Financial Advisor for more information.
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