Sending children off to college can be a very stressful time for many parents. Worrying about whether your child can handle being on his or her own is a big concern, and rightly so. Most college students leaving home for the first time have never had to look after themselves. Many parents struggle with figuring out how to make sure their child has the money needed while keeping the child from overspending. After all, sending your child to college is a very expensive proposition, and it’s important for your financial well-being that costs remain in check. To make matters more complicated, most kids headed to college have never had to live within a budget or manage money and credit cards. No wonder it is such a stressful time for everyone.
In an ideal world, parents should try hard to teach their kids about money and teach them how to handle credit cards, and do so long before the kids leave for college. However, that, unfortunately, is most often not the case. Because so many college students leave home with no experience in the ways of money management or the handling of credit cards, they will, invariably, make mistakes and overspend. If given a monthly allowance, some students will have trouble managing money and budgeting well enough to get them through the entire month. College students who have never had to manage money or credit cards have little perception of what things cost or how to stretch a dollar to make ends meet. When a college kid runs out of money, the phone calls to home can be stressful for the student and the parent and cause undue conflict.
It’s important, though, that college students learn how to manage money responsibly and start to build a good credit history along the way. Once they graduate and start working, they will at some point need to buy a car or rent an apartment. These days, renting an apartment requires a good credit history to avoid paying large deposits and/or having a cosigner. If they ever want to be able to cut the apron strings from their parents, college students must build a solid credit history for themselves. However, this can be difficult for most full-time students who are not working. Because of banking laws, no one under 21 can obtain a credit card unless that individual earns income or has a cosigner. This will, unfortunately, be the case for almost any loan or revolving credit account, so building credit is very difficult for these folks.
Many parents like the security of giving their kids credit cards when they head off to college, so in the event of an emergency or unexpected expense they will have a way to take care of it. However, without the proper knowledge and experience, many students don’t handle it well, and parents end up with unexpected debt and aggravation. This is usually the case when clear rules and consequences are undefined in advance. So, how can parents help their college students build credit, learn to manage money, and be responsible with credit cards without incurring the burden of unexpected debt?
Make your student an authorized user on your account
One way to introduce your college student to handling credit cards is to make the student an authorized user on one of your credit card accounts. This can and should be done before the student leaves for college to help the student learn to make good purchasing decisions. You should make sure your child is ready for the responsibility before introducing him or her to credit cards because, ultimately, the student’s use of the card is your responsibility. Any charges incurred will be yours to pay back.
Once the student is an authorized user on your account, he or she will receive a card. Usually, the card will have a separate account number, which will make it easy to distinguish the student’s charges from yours. This will make reviewing charges at the end of each month a simpler process. While it only takes a phone call to add your child as an authorized user on your credit card, you should first cover a few things.
How much can the student spend on the credit card each month?
Setting a spending limit for your child is a good idea. This will help the student understand the concept of budgeting and overspending. Most cards will allow you to cap the purchases made on the student’s credit cards, and this is a good thing. Nothing teaches a student a lesson faster than a declined charge. Start with a small limit of a couple a hundred dollars and see how it goes. Reviewing the statement with the child each month gives you the ability to talk about purchases and the decisions made. If he or she knows charges to credit cards will be scrutinized, it will help the student resist impulse buys and frivolous charges. You will also have the ability to raise or lower the spending cap along the way. Once a student has learned to manage spending appropriately, you can allow a little more leeway.
What items may the student purchase?
Defining what the credit card is usable for will help your student make the right decisions on purchases. Are credit cards usable for everyday expenses, or only for emergencies and out-of-the-ordinary expenses? It is probably wise to have the student use credit cards only when absolutely necessary, which should make reviewing charges at the end of the month easier. Giving your child some examples of acceptable expenses to put on credit cards, and some guidance on your expectations will help you avoid misunderstandings.
Should the student ask permission before using the credit card?
This is dependent on how your college student may use the credit card. If he or she is using it to pay for everyday expenses, then seeking permission each time is not practical. However, if the card is only in use for non-typical expenses and emergencies, then having the student ask permission before a purchase is a good idea. In a true emergency, there may not be time or the ability for the student to seek permission, so common sense should prevail here. After all, the whole purpose of giving your child credit cards is to teach about making good decisions. Waiting for permission when there is a true emergency could be a bad decision. When there are things that arise such as a car repair or a doctor visit, your student should have plenty of time to seek your permission.
You should also discuss ahead of time the consequences of not using credit cards properly or abusing the privilege as an authorized user. The consequences of abusing the credit card should be taking the card away completely, at least for a period. For lesser offenses, perhaps lowering the spending limit or counseling is the better way to go. Remember, credit card companies are not tolerant of consumers who misuse their credit cards, so, in order to teach properly, you should not be either. It is important that you enforce the rules and hand out the consequences when necessary.
Cosign a credit card account for your college student
Another option for parents is to cosign for a credit card for their student. When you cosign for a loan or credit card, you are guaranteeing that if your college student does not repay the debt, you will. Some risks exist here, especially if your child has never had to manage money before. However, some students, especially those who have held jobs through high school and have received some financial guidance, could be good candidates for a cosigned account. Not all credit card companies allow a cosigner; check the chart provided (courtesy of NerdWallet) to see which of the major ones do.
As with any significant financial step, you should discuss a few important details with your child beforehand.
How large will the credit line be?
Determining the amount of credit extended to your child is a very important step. As a cosigner, chances are strong that the line of credit offered will be based on your credit history, not that of your child. If you have good credit, the credit limit offered could be quite high, but that doesn’t mean you have to accept it. It would be wise to keep the credit limit relatively small until you can gauge how well your child handles the responsibility.
Who is responsible for the balance due?
While you are both legally responsible for the charges, there should be some discussion and agreement between you and your child as to the intent of the arrangement. If you are paying all of your child’s college expenses, then it would make sense that you are expected to pay the balance charged to any credit cards given to the student. However, if your co-signature is merely there to make it easier for your child to obtain a credit card and build a credit history, then make it clear that you expect your child to be responsible for the balance due. Defining these rules ahead of time will make things easier for you and your child down the road.
Who is going to make the payments?
As mentioned, if you are paying for your child’s college expenses, then most likely you will be making the payments on the credit card you cosigned. However, if merely trying to help your child get a credit card and build a credit history, then the assumption is that he or she will make the payments. If you are expecting your child to make the payments, then it’s imperative that you monitor the account to make sure payments are being made on time. College students are busy and usually inexperienced in the responsibilities of revolving credit. Remember, skipped or late payments will have a detrimental effect on your credit as well as that of your student.
When will the parent come off the account as a cosigner?
At some point, it will make sense for you to come off the account as a cosigner. Discuss the timing of this ahead of time so there are no misunderstandings down the road. When your child graduates and begins working, it will be much easier for the student to get a credit card based on his or her own merit. If you have been making the payments on the cards, you should counsel the student on the responsibilities of having credit. Running up a big debt is no way to start in this world, so make sure the student understands the repercussions of acting irresponsibly with credit.
Unfortunately, too many college students graduate with more debt than they can handle, especially if they have student loans. Sometimes, they must seek relief with a debt settlement company. Companies such as National Debt Relief are able to help students who find themselves in over their head.
Benefits to the college student
There are upsides to your child having a credit card throughout his or her college years. If handled properly, credit cards can help individuals learn basic money management skills and build a credit history. Adding your child as an authorized user on one of your credit card accounts gives you significant control over spending and helps your child build a little bit of credit. Being a cosigner for your college student helps the student build credit faster but carries more risk since you have less control over the account.
Making the right financial decisions for your college-bound child can be difficult as you manage the many other details of getting your child settled. That’s why it is best to start educating your child about financial matters early, before he or she leaves home. By teaching the student some basic money management skills, and the art of budgeting, you can set your child up for not only a good college experience but also a stable and financially rewarding life. Don’t wait; start educating your children today.