5 Ways to Help Your College Student Avoid the Credit Card Sinkhole
Submitted by Lara Coviello
Getting your first credit card is exciting. There’s no doubt about it. All of a sudden you have independent purchasing power that you never had before. You can go to a restaurant, the gas station or the supermarket and just say, “Charge it.”
There’s just one hitch to using your credit card a little too enthusiastically: You still have to pay the bill every month. That’s where things get sticky.
Credit card companies will employ all kinds of marketing ploys to get college kids to sign up for plastic. Oftentimes, they set up a table on campus – in front of a student center or another popular spot – and offer free t-shirts, reusable water bottles, flash drives or hats. And it usually works because most college kids enjoy getting free stuff.
The problem is, the stuff isn’t really free. It comes attached to a monthly interest price tag, often a hefty one, and if the total bill isn’t paid in full every month, that interest can start adding up to a mountain of debt.
So what can parents do to help their college-age children avoid the temptation of swiping with abandon? Here are five ideas to help everyone get on the same financial page:
1. Get a credit card with a low limit. I got my first credit card when I was in college, and it had a $2,000 limit. That was fine for me because I was naturally budget-conscious and not a big spender. But for someone else – say, someone who likes to shop and eat out – a lower limit would be better.
The lower the limit, the less you have to spend and the less you have to pay off every month.
Oh, and start with one credit card, no matter how many offers come through the mail slot. Once you’ve mastered the art of controlled spending with one card, then you can think about adding another to your wallet.
2. Never swipe more than your budget allows. Charge only what you know you can pay off each month. That means sometimes saying “no” to that little black dress or the fabulous pair of shoes – even if they are on sale.
This is a critical part of learning how to budget and how to live within your means. So if your discretionary spending one month is only $50, then that is all you can spend on your credit card. Period.
3. Pay off your bill in full every month. A credit card isn’t Monopoly money. It’s real, and the debt you rack up will follow you until you pay it down to zero. Down the line, that can mess with your credit rating, which can in turn affect whether or not you can rent an apartment, get a car loan or a mortgage, and so on.
If this month’s bill is $1,500, then write a check and write it off to a lesson learned. The last thing anyone wants is to be paying off that $1,500 in monthly installments over 10 years, and to wind up paying twice original amount or more, thanks to rapacious interest rates. All because you didn’t pay it off all at once.
4. Choose a card with perks. These days, credit cards come with all kinds of incentives, including no annual fee, cash back when you pay on time, a low interest rate or 0% interest rate for the first year, rewards in the form of 2% back on all purchases, or a minimal security deposit. Take advantage of the situation, and choose a card that works well for you.
5. Use your card. Surprised? That’s right. Don’t avoid your card for fear of piling on the debt. As an adult, you’ll need a good credit history in order to take out loans or buy a house.
Just as a bad credit record can affect you ability to borrow and buy, so can no credit record. So go ahead and use your card. Use it wisely and pay it off every month, and you’ll be surprised how quickly you can build up goodwill in the credit department.
Lara Coviello, MA CFA is a managing partner with Auctus Wealth Management.
She began her career as a research and statistical analyst in 2004. She started in the financial services industry doing risk assessment and market analysis, and researching public and privately held companies, and soon expanded her role to include portfolio management.
For more information on Lara visit Auctus Wealth Management HERE.
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