Should a freshman in college have a credit card?
Opinions are divided, both among parents and financial advisers. It's a situation that can work out really well or really badly, depending on the student and the parents.
At its best, everyone benefits from giving a student a card. The student uses the card for budgeted expenses, pays off the balance each month, and starts building a good credit history. The parents sleep better knowing the student has a credit source in case of emergencies.
At its worst, the student is unused to managing money or living within a budget. They fail to make payments on time, incur high interest charges, and ruin their credit history. The parents have to step in to bail them out.
Among the many risks:
- Lack of experience in managing money can lead a student to overspend, or to neglect making payments on time.
- Peer pressure may encourage a student to spend on entertainment or clothes, just to keep up with friends.
- Failure to agree on a budget beforehand can result in shock when you see your student's monthly statement.
- Parents co-signing for the card can put their credit scores at risk too.
- Loss or theft of the card can lead to problems that take hours to resolve.
To minimize risks:
- Set ground rules for use of the card. Agree on what it may and may not be used for. Put the agreement in writing and have the student sign off.
- Establish a budget. Talk regularly about how your student is managing his or her expenses within the budget.
- Consider alternatives to a credit card, at least for the freshman year. Consider using a prepaid credit card, or set up a checking account with a debit card. That allows the student to gain experience managing expenses within a budget.
Finally, remember you may have no say in the matter. Students are bombarded with credit card offers as soon as they enroll. Card companies are usually happy to issue a card to any student over age 18 in his or her own name.
Please contact our office for more ideas and information on the tax aspects of giving financial gifts.
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