Most parents with children in college or nearing that age are thinking the same thing, “How can I teach my child about how to live within their means and not come out of college with a truckload of debt?” Our financial guru, Julie Cole, has some advice for parents on this subject.
Students live in a culture of debt. Many borrow tens of thousands of dollars to pay
tuition, room and board. Credit cards are readily available to most students to connect their wants with means. The average graduate of a 4-year degree program will leave school with $19,235 of student loans and $2,330 dollars of credit card debt.
Entering the working world, these new graduates may encounter lower-than-expected
salaries and higher-than-expected living expenses. College loans and credit card debt are
following college graduates into their late 30’s and 40’s. Credit card debt will affect your
ability to get car loans and mortgage loans in the future.
Credit card success starts with parents. The key to having children with successful money management skills lies with parents. Parents who teach their children basic money management skills before they hand them a credit card increase the likelihood of long-term financial success. Take the next few months, before you send your son or daughter off to college, to teach your student how to handle credit and protect their credit rating. Here are a few tips:
- Take time to establish a monthly budget, one that has realistic numbers. Compare expenses to the budget every month. Make adjustments as necessary. Maintaining an auto tends to be the largest expense that your “almost adult” child incurs. Make sure that the monthly budget includes car repair and maintenance expenses. Budget for oil changes, replacement tires, repairs, insurance, license fees and gas.
- Start an emergency fund. Set aside at least 10% of each summer paycheck to put into a savings account that is to be used only for emergencies.
- Establish a credit card and limit your monthly expenses on the credit card to 10% of your overall monthly expenses. For example, if your expenses are $500 in a month, then put $50 of your expenses on the credit card. Then pay off the $50 credit card bill the next month. This will get you in the habit of paying off your credit card expenses and establish a great credit history.
- Be on time with your credit card payment. If you are late paying, it will probably be reported on your credit history. Late payments will also incur extra late fees and finance charges. Late payments can also cause your interest rate to rise.
- Ask your credit card company not to raise your credit limit. If you demonstrate a history of paying your credit card bill on time, the credit card company will automatically increase your credit limit periodically.
- Avoid cash advances on credit cards. There is usually a hefty fee plus the finance charge accrues from the day you take the cash.
- Think about every purchase you make. If you can’t afford it now, you will likely not be able to afford the purchase next month when the credit card bill comes due.
- Parents. If your student isn’t demonstrating responsible credit card abilities before they go to college, cut up the credit card and notify the credit card company that no additionally charges are allowed.
The learning curve with credit is steep and there is little room for trial and error. Mistakes
in college can haunt students long after graduation. Credit scores can impact whether they
get their job of choice, whether they qualify for an apartment and even whether they have
to pay more to get their utilities turned on. Students, be smart, use credit wisely.