In all the preparations to get a college freshman ready to live away from home, one crucial area may get scanted: money management. A financial expert offers tips for educating your child on the dangers and responsibilities of financial freedom.
by Kathie Sutin
If your child is leaving for college for the first time this fall, chances are you’re both spending a lot of time deciding what items she should take along, shopping for clothes and dorm room furnishings, and planning how to get it all to campus.
But in the plans and preparation, you may be overlooking an area that the student living away from home for the first time needs guidance on—managing money.
It’s one of those areas of parenting children to which we don't usually give much thought. But college students of all ages usually need some education on the topic.
If you haven’t yet had a discussion on checking accounts and how to use a credit card, now is the time. In fact, says Victoria Jacobson, director of the Center for Excellence in Financial Counseling at the University of Missouri–St. Louis, this is a discussion parents should be having with their high school students.
“I think it’s something we as parents tend to forget that our kids need to know about,” she said.
With direct deposit of paychecks and automatic deductions for the mortgage, car payments, and credit card bills, not to mention the ability to pay bills online, “a lot of children do not observe their parents paying bills much these days,” she said. “A lot of them are growing up not realizing that there are deadlines and that payments have to reach the company at a certain time.”
And, they’re not aware that being even a little late can be very costly, Jacobson said. Late fees can be $39 or more. Chronic tardiness in payment is reflected on the customer’s credit report.
Checking the debits and credits
Being a good consumer will save money and help avoid long-term debt. Jacobson suggests that when the student gets that first job, parent and child open a checking account together so paychecks can be deposited and “a little bit of money” can be spent by check.
“We really can’t expect our kids to manage money until they have some money to manage,” she said.
Jacobson said parents should sit down with the child when the first statement comes, and demonstrate how to reconcile and balance a checkbook. “A lot of kids don’t know how to do that,” she said.
Parents should also explain to teens how a debit card works—that they need to subtract debits from the checking account and be aware of fees attached to using an ATM machine not in the bank’s network.
Credit card challenges
Credit card use is another area where students need guidance, Jacobson said. “The biggest challenge with college kids and credit cards is that magical age of 18 when a student can get a credit card without the parent’s knowledge,” she said.
“A lot of young people become almost intoxicated with that minimum monthly payment. They think, ‘I can enjoy all of this for only $10 a month,’ but they don’t understand how many finance charges are accruing.”
If your child hasn’t been taught about credit cards, Jacobson said that the summer before college is a good time to start.
“No doubt the child has been receiving all sorts of pre-approved applications in the mail before graduation. That’s a perfect time to screen the offers. Open them with the child, sit down with several of them, and do the comparison on the disclosure statements. Do some positive education along with the admonishments.
“Some student rates are just outrageous—very high,” she said. “I’ve seen as high as close to 20 percent. The trouble is, if students don’t know and understand APRs, periodic daily rates, revolving balances, and grace periods, they can get themselves in big trouble.
“It’s not a bad idea to take out one of your credit card statements and show your child what your APR is and what the daily periodic rate was that month. Show the child all the boxes on the statement and how much you actually spend.”
Teens also need to understand that it’s important to pay the bill on time, said Jacobson. “If you pay by mail, you need to allow five to seven days for payment to reach the credit card company because a lot of companies are putting on late fees and over-the-limit fees. And if you’re late, they also have the right to up your interest rate.”
Read the fine print
Jacobson also suggests that the parent and child determine if the credit card offer is an introductory rate and when it expires. “Also check if it’s one of those offers with a certain percentage rate plus whatever the prime is,” she said. “Check all that stuff out.”
Teens also need to know that the credit card application is a contract that “you’re entering into and you have to follow it,” she said. “You pay as agreed and pay on time. Those are the rules.”
Jacobson said that there are pros and cons on whether a college student should even have a credit card.
“A parent probably sleeps a little bit better knowing their child has access to a credit card for emergencies, but then you have to define what exactly an emergency is. One credit card is really quite enough. If you need more than that credit limit, that needs to be discussed,” she said.
Teens need to know that while credit used appropriately by someone who understands its obligations and charges is useful, abusing it can be dangerous.
“The student who gets one credit card, maxes it out, and gets another one and another is the problem,” Jacobson said. “What’s really sad is when you see a young person graduating from college with a lot of credit card debt plus student loans and a car payment.
“Kids don’t understand that the credit history that’s being built up on their credit report plays a very important role for the rest of their lives. It’s important in renting an apartment, buying a car, or getting a mortgage. Even some employers want permission from job applicants to pull their credit report. Some kids don’t realize how the system works until it’s too late.
“Negative information stays on the report for seven years. Good, positive credit continues to build.”
Kathie Sutin is an award-winning freelance journalist based in St. Louis, Missouri. She specializes in writing about medical issues, travel, parenting, education, business, food and people. She has three children.