We send our children off to college to learn a career and to succeed in life. During this college experience, our children will need to face various options of independence, which includes financial decisions and credit. Financial literacy varies greatly by student but it is an important step in this transition for all students. Due to the increase cost of college and the demands of student loan repayment, many colleges are adding financial literacy programs as part of their college experience.
In a Reuters article titled, “Start college kids with bank accounts, not credit card”, the author Sue Weston discusses the importance of teaching your child money management. Ms. Weston suggests that giving a checking account may help your child become better prepared for handling their finances while they are away in college as opposed to using a credit card.
I mentioned in an earlier blog about setting up a bank account on your child’s campus. For most students, this is the first checking account they will have. Learning to balance a check book correctly can involve trial and error. Bouncing a check can be an expensive lesson. From my own personal experience with my own children, this was something we needed to teach our own girls. Make sure your child understands the consequences of how to handle this account correctly before they go to college as it can improve their ability to understand cash flow and budgeting.
Some college students may also arrive at college with access to their parent’s credit card. They have been added to their parent’s credit card as an authorized user. For some this may be used only for emergencies while others may use it for weekly purchases. Bad habits can arise when students rollover the balance or chose to just pay the minimum balance. It is something a parent will need to oversee and make sure they are being used correctly. Most of the colleges have college money that can be part of the college ID. This can be a great alternative to the credit card.
The article discusses how a student’s credit history could be ruined if credit cards are not managed correctly. I want to go a step further and discuss how specifically this credit card debt can affect the student as far as student loans. This is especially true if a student is using private loans to finance their education. A few errors in late payments can affect their ability to consolidate their private loans. It will hurt by not allowing them to get an attractive interest rate.
When a student graduates from college, independence is one of the key goals for a person. In this quest, a student will have to create a budget to determine if they can afford to live on their own. For those with student loans, it means figuring out the total of their student loan debt. Having the knowledge of budgeting and cash flow will better prepare them for this transition.
Having bad credit can be a burden for many young adults who are just starting out. Parents should have a discussion with their child especially when they get closer to 21 since it becomes easier to obtain a credit card.
Many students do not realize the consequence of bad credit and how it will impact their private student loan consolidation. Having the bad credit will limit the interest rate the person is able to get and make the consolidation and repayment more expensive.
When students begin college they are not looking that far into the future. This is why it is so important to have open discussions with our children about money management and what kind of life they want in the future. Don’t wait until college to teach your child about money management. Start early so that they can limit their money mistakes. College Affordability, LLC believes becoming informed about financial decisions is one of the most important lessons to teach our children.