Scott Brown, Wealth Management Group, Dover, Del.
Several months ago, BAM ALLIANCE member Scott Brown described a practical and safe way for teenage children to gain experience with credit cards and bill paying while still in high school. Here’s a follow-up discussion with Scott about responsible credit card usage for young adults.
Q: When should students have credit cards of their own?
Scott: College is not a great place to learn how to use a credit card. Parents can help kids learn about credit while still in high school, and I strongly suggest it.
However, for a student that has not had that preparation, I’d say that a debit card attached to a checking account is a better fit for a college student than a credit card. Most students are not generating much, if any, income in college, so they are not in a great position to be making credit card purchases and paying them off right away.
Q: So, students should ignore all the offers they see on campus for quick and easy credit card applications?
Scott: Yes. The offers can be very tempting with $50 account credits, T-shirts or other free stuff just for using the card a few times. However, it is easy to run up big bills, miss payments and make other missteps that can negatively affect one’s credit for years. The freebies aren’t worth it.
Q: So, it is better to wait until after graduating college to get a card?
Scott: Generally yes. I suggest students carry a parent’s card, with some clear parameters on when it should be used, such as for books and transportation, but not for taking roommates out for dinner. Having accountability for what they charge will help build good habits.
Q: Are you saying that students can’t be trusted with the responsibility of credit?
Scott: I think it is more about experience than trust. It’s not wise to give kids keys to a car without some training and experience behind the wheel. They need practice and feedback to avoid dangerous behaviors.
Q: What behaviors are you thinking about?
Scott: There are plenty of ways to compromise our finances and future credit worthiness. They can be bad for students and expensive for parents who may have to come to the rescue. Running up obligations with no way to pay is an obvious disaster. Paying just the minimum payment can be pretty bad, too. The tab rises quickly as someone pays interest on the old balances, on new purchases, and on interest as well.
Regarding all those credit offers on campus, opening those cards to get the goodies and then promptly canceling the cards leads to a lower credit score.
And if things get way out of hand, you see people transferring balances from one card to another hoping to avoid penalties. That’s a perfect storm that just gets worse and worse.
The credit scoring algorithms want to see balances that stay in control, consistent on-time payment, not too many new credit applications, and accounts that stay open to build a history.
Q: Does your credit score really matter that much when you are young?
Scott: Very much so. A low credit score will not only affect the rates on car loans and other consumer credit. It can also affect things like car insurance rates, the ability to rent an apartment, deposits for utilities and many other elements of getting started on your own. Even some employers check history in the hiring process to gauge reliability and maturity. There’s just no upside to a bad credit score.
Q: So what do you suggest for parents and students?
Scott: If parents can give their kids experience with credit in high school, I strongly recommend it. Students shouldn’t really have credit cards in their own name until they are in a position to pay them off in full each month. At that point, I suggest they have only one card with a low credit limit and pay off the balance each month. Many cards now allow users to set up email alerts that remind them when to make payments, which I strongly encourage using. Missing even one payment can be a very costly mistake.
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