As your teen prepares to leave the nest for college, you will find yourself navigating a maze of important decisions. Between buying extra-long twin bedding and scheduling those last-minute doctor appointments, there is a critically important decision that can set your child up for success or failure – whether to send them to school with a credit card.
The choices you and your child make about this simple piece of plastic are weighty. Getting a credit card early can build your child’s credit and their financial responsibility, but it also has significant risks.
What should you consider before you send your child to college with a credit card? And how can you prepare them for success?
This article will discuss the pitfalls and benefits of credit cards for college students, important factors to consider and how to prepare your child to have a credit card.
Credit cards and college students
Building credit is the top reason young adults give for opening a credit card.
According to data from WalletHub, 85% of college students have a credit card. Just over half of those college-aged credit card users pay the full balance on their cards each month.
However, a third of college students pay just the minimum balance or a bit more. Carrying a credit card balance is dangerous because it can quickly snowball into significant debt. The average credit card balance among college students is $2,088 (excluding $0 balance accounts).
Below are some common college credit card pros and cons.
Credit pitfalls for inexperienced students
Young adults with a credit card typically lack financial literacy and guidelines for using credit, which can quickly get them into trouble.
- They don’t understand how credit cards work. Often, young adults struggle to understand how credit cards work and that they must repay the money they borrow.
- They don’t understand compounding interest and how quickly their small balance can grow if they miss payments or only pay the minimum balance.
- They are not in the habit of budgeting or regularly paying bills.
- They give in to peer pressure. College students often feel tempted to overspend on dining out or to match the spending habits of others.
- They don’t understand the importance of safeguarding their credit card number. College students may have a false sense of security and leave their credit cards lying out in their rooms.
“The most common mistake we see is overspending,” said Kim Cole, Community Engagement Manager for Navicore Solutions, an FCAA credit counseling agency. “Ironically, many charges we see are the students taking their friends out for dinner or buying drinks for everyone at a local bar. They use the card as a social tool, and when the payment on the credit card comes due, they are not prepared to pay back what they charged.”
Depending on the type of card your child has, their risky behavior or mistakes could affect your credit, too. It’s critical to ensure your child is ready for a card, has clear rules and expectations and understands how credit cards work.
Benefits of building credit in college
Sending your child to college with a credit card does have its benefits. Opening a credit card while in college can be easier for some young adults, and it lays the groundwork for building a positive credit history.
A good credit score can help college grads as they rent an apartment, apply for jobs, refinance student loans or open other credit card accounts.
Having a credit card in college can teach financial responsibility, budgeting and the importance of paying bills on time.
Signs your student may be ready for a college credit card
Before your child took their first steps, you learned to see their progress and encourage them. Those same observational skills will help you recognize the signs that your child is ready to get their first credit card.
Look for your child to exhibit these capabilities:
- Maturity – Teens and young adults tend to be impulsive and make decisions based on emotions until their brains fully develop in their mid-20s. Exhibiting financially responsible behaviors, like paying back borrowed money or saving for a large purchase, are signs your child may be ready for a credit card.
- Ability to pay off credit card balance in full each month – “In my home, I would not allow either of my children to have credit cards until they were over 18 and had the ability to pay back the amount they had charged on the credit card,” shared Cole.
- Good understanding of financial literacy and how credit cards work – Your teen should regularly check their bank account, budget their money and demonstrate an understanding of how credit cards work.
Preparing your child to have a credit card
“Parents should be teaching their children basic financial literacy before their teens get their first credit card,” said Cole.
Financial literacy is the knowledge, understanding and ability to manage one’s personal finances well. Parents teach financial literacy to their children by teaching them how to manage their money, save for a big item or event, open a bank account, and more.
“Topics such as compound interest, credit reporting and scoring, and understanding how to establish a budget will give them a better understanding of how credit cards work,” Cole said.
“They need to understand that when they charge items on a credit card, they will pay more for the item if they do not pay off the card in full each month. Young adults also need to understand the penalties for missing payments and the rewards that come with excellent credit.”
Todd Christensen, Housing and Education Manager for Debt Reduction Services, recommends that young adults meet four financial responsibility guidelines before opening a credit card:
- Find and maintain a steady income for six to 12 months, expecting it to continue.
- Create and live by a budget for six to 12 months.
- Build a savings fund to cover one to two months of living expenses.
- Use a debit card for six to 12 months without any declined charges.
Read about more financial milestones for Gen Z.
Selecting the best credit card for your teen
When selecting the right credit option for your college student, you have a few options, including a secured credit card, a student-specific credit card or making your child an authorized user on your credit card.
A secured credit card is a type of card backed by a cash deposit provided by the cardholder, in this instance, you or your teen. The deposit is essentially collateral in case your child cannot make timely payments. The deposit becomes the credit limit. Secured credit cards typically have more fees, but people regularly use them to build their credit score.
A student-specific credit card is designed for young adults attending college, either full-time or part-time. No collateral or security deposit is required. Applicants without a credit history can apply for a student credit card. Some credit companies let college students transfer their credit cards to a regular account after graduation.
Adding your teen as an authorized user on your credit card gives them a card with their name on it that is linked to your account. If your child is responsible, this can be a good way to gradually give them more freedom. But it is important to remember that you are ultimately responsible for anything your teen charges.
“You can contact the credit card company and have them put a limit on the amount that can be charged, therefore guaranteeing that the student does not charge more than you are comfortable with,” shared Cole.
Setting appropriate limits for your child’s first credit card
Regardless of what type of credit card you choose, setting clear rules and expectations for how your child uses and takes care of the card is a must.
“First, a conversation should be had about what the college student should be charging on the credit card. If it is for emergency use only, define what an emergency looks like,” said Cole.
Then, outline clear spending limits, payment requirements and the consequences of misusing the card. Responsible use of credit is possible for college students, but they should start with a small credit limit and pay the bill in full each month.
According to Karen Carlson, Vice President of Education for InCharge Debt Solutions, if the student is paying the bill, the prerequisite needs to be a job. “The initial credit line should be small ($300 to $500), and the student should monitor their spending using technology (alerts from a budgeting application, for example),” says Carlson.
“If a parent is paying the bill, then the student should be an authorized user on the parent’s account,” she continued. “Parent and child should set expectations around acceptable monthly spending. Both should monitor weekly to make sure things don’t get out of hand.”
“Being responsible with credit means not only using the card wisely but also taking the proper precautions to prevent credit card theft,” says Cole.
Cole urges parents to talk with their college students about protecting their credit card number, knowing where their card is at all times and not leaving it out in the open, even while in their dorm room.
Credit counselors are here to help
Sending your child off to college is a big step, and so is giving them access to credit cards. Before you say “yes” to a credit card for your college student, consider whether they are mature enough to handle credit card responsibility.
Every day, the Financial Counseling Association of America helps people who have fallen into debt and need help to get back on their feet. Our nonprofit member agencies have certified counselors who listen without judgment and offer unbiased advice to help people create livable budgets, better understand their finances and overcome their debt.
Carefully consider whether a college credit card is the right step for your college-bound student to prepare them for success. If we can help you or your child with free financial advice, don’t hesitate to call 800-450-1794.