How to Avoid College Credit Card Debt
Never put a tuition payment on the credit card in a pinch because the interest payments will eat you alive.
After you've nailed down a budget, you and your student face a basic decision: how to transfer money from the Bank of Mom & Dad to your student in a secure and timely manner.
Paper checks and snail mail will do the trick, but why bother when electronic transfers are available? Such transfers can be a snap, especially if you and your student use the same bank.
"You don't need bricks and mortar to do banking," says June Walbert, a Certified Financial Planner at USAA Financial Planning Services. "Kids are Internet-savvy and can do everything online."
Think about who will pay the monthly bills. If your student has little or no experience with money, it might be smart for the parents to write the tuition, dorm fee or rent checks – at least at first. Even if your student handles money well, consider depositing the tuition and rent money in your student's account just before it will be needed.
A pre-paid card might be a good way to avoid financial trouble and manage your student's spending. Think of it as financial training wheels for your student's first effort at managing money.
Such cards are accepted just about everywhere credit cards are used, but a line of credit isn't extended to the student. Instead, money must be placed on the card prior to its use. The student can add money from savings or the parent can transfer money each month. The monthly statement can be a valuable tool in tracking expenditures and staying within budget.
Prepaid cards shouldn't be confused with debit cards that draw money from an existing bank account. These cards are suitable for a student experienced in handling money, but aren't a good choice for novices.
"Prepaid cards don't help build a credit history, but do help build financial responsibility that leads to a good credit history down the road," Walbert says.
Most students don't have a credit history before sitting down to freshman composition and a credit card can be a good first step. In most cases, play it safe by holding off on a credit card during your student's first year away from home. Keep the credit limit low when your student gets a card during the second or third year of study. Think about boosting the credit limit each year – maybe starting at $500 and rising to $1,000, $1,500 or $2,000 tops in your student's senior year.
Underscore the importance of paying the bill in full each month. This allows your student to use the bank's money interest free for a month. Make sure the kid understands the finance charge for late or partial payments on the balance due. Pencil out the interest charges on a hypothetical unpaid balance and show your student how this can be crushing if additional charges are added to the unpaid total each month.
Make this point: Never put a tuition payment on the credit card in a pinch because the interest payments will eat you alive. Tell your student that tuition is due on a pre-determined schedule and a good budget will be able to handle the payments.
Rule of thumb: Keep the credit limit low. If your student gets into trouble, it's possible to dig out of the hole without destroying your budget. Tell your student that building a good credit history as an undergraduate will pay off in the future when a car and then a house become facts of life.
"If your student makes a foolish mistake, take money out of the kid's pocket to cover it," Walbert says. "If it's a large mistake and the parents have to cover it, make sure your student pays you back over time. That's a lesson in responsibility that can last a lifetime."
Shop around before signing up for a credit or pre-paid card. Some cards come with steep fees, and there's no need to pay a bank for the privilege of having your money. Smart banks realize that signing up college students gives them a shot at retaining them as high income customers after graduation and therefore offer most services free, especially if the parents use the same bank.
Most provisions of the new Credit Card Accountability, Responsibility and Disclosure Act of 2009 take effect in February 2010. It sets limits on credit card issuers' ability to jack rates and requires clear disclosure of all fees and rules.
Talk with your student and decide what works best. Your choice doesn't have to be either/or and a combination of credit and pre-paid cards plus an occasional paper check will give your student needed experience in handling money the old-fashioned way.
"Ideally, you've had financial discussions with your student since high school," Walbert said. "If your kids know early that they'll have a role in financing their college education, they may work harder for a scholarship and may be more inclined to put some of their money from part-time jobs away for college."
Click here for five things college students need to know about handing money.
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