When you send your college student off to school with a credit card, it’s natural to worry about him damaging his credit — or yours. Anyone with a credit card runs some risk of building up debt.
But credit cards can also help college students learn how to track spending, pay bills responsibly and avoid interest and fees. Perhaps most important, credit cards give young adults and their parents a chance to talk about finances at least once a month, when the bill comes.
For those reasons, financial experts say credit cards can be a valuable tool for teaching your college student how to budget, as long as you follow some ground rules:
Let your college student make some (minor) mistakes
The Credit Card Act of 2009 makes it hard for college students who don’t have an independent income to qualify for a credit card on their own, so many students first become authorized users on a parent’s card.
To reduce the risk of overspending, parents could add a student to a card with a low credit limit, such as $500 or $1,000. “Parents can see all of the activity and coach them,” says Jennifer Harper, founder and director of Bridge Financial Planning in Chattanooga, Tennessee. The risk, though, is that if a student overspends, it could hurt the parent’s credit score.
At the same time, Harper says, allowing your college student to make some mistakes might prove helpful in the long run. If they spend more than planned one month, you can talk about what happened and how to prevent it in the future, she says. “Now they can still be teachable moments — later it will be bigger dollars without parental guidance,” she says.
Stress the importance of paying in full
When you pay your credit card balance in full every month, you don’t get charged interest. Further, committing to paying in full requires you to live within your means — spending only what you can afford. Helping a student understand this can lower the chances that he or she will rack up debt later.
“Show them a credit card statement,” Harper suggests, and walk them through how to review the charges, check the interest rate on the card and understand any fees.
Schedule a monthly chat
The monthly credit card bill is an opportunity to review spending with your college student, and spending is easier to track with a card than if you’re using cash. That’s what Preeti Shah, a financial planner in Matawan, New Jersey, found when she worked with clients who had a son in college on their household budget.
At first, the couple deposited a flat amount into their son’s bank account each month, which he supplemented with part-time work. But he quickly burned through his money and never seemed able to pinpoint where it went.
When the couple switched their son to a credit card, they were better able to monitor his spending — and realized he was spending far too much at restaurants instead of using his meal plan.
Pick a card that earns rewards
If your college student is using a credit card, he or she might as well be earning rewards for purchases.
Helen Ngo, a financial planner and founder of Capital Benchmark Partners in Atlanta, says she encourages parents and students to use cards that give cash rewards for spending in specific categories that are common in college students’ budgets, such as gas and groceries. This teaches how to get the most out of a credit card, in addition to how to use one responsibly.
Help your child build credit
Authorized user status can help your college student build credit, so the new graduate will have a strong credit score along with that diploma. “It’s nice to build your credit history early,” says Brian Hanks, a financial planner in Salt Lake City.
Even more important, he says, is learning to take responsibility for one’s spending. “Most college kids are ready,” he says.
And if they’re not, making a few mistakes now could help them get there.
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Kimberly Palmer is a staff writer at NerdWallet, a personal finance website. Email: [email protected] Twitter: @KimberlyPalmer.