On Thursday the long anticipated Credit CARD Act goes into effect, but this may offer parents with kids heading off to college little comfort. That's because the rule restricting those under 21 from signing up for their own credit cards won't be in place until February. In the meantime, you can expect banks to troll campuses and try to open up as many new accounts as possible. So you had better ask yourself how you will help your child manage his shiny new Visa card.
Some parents may beg their children not to sign up for a credit card and instead offer to add their kids as cardholders on their own accounts. Adam Levin, founder of Credit.com, recommends this approach. He argues it allows Mom and Dad to better manage a child's first credit card experience.
I can see how some young adults may need a bit of hand holding. And it's up to you to judge if you have one of these kids. But I would rather see parents use this opportunity as a "teachable moment" and help their children learn to manage money and credit on their own.
So how do you help your kids learn to be financially independent? First, don't be afraid to sit down with them and have a money talk. If you're afraid your son or daughter will just tune you out, make sure he or she is aware that the conversation will include how much spending money you plan to provide. If nothing else, that should certainly get any college kid's attention.
Start off with the basics. Explain the importance of budgeting and help your child come up with a monthly spending plan for her first semester. Understandably, there are going to be some expenses that neither of you will be able to anticipate before school starts, but it's important that there's some kind of plan in place for orientation. The two of you can always reassess the budget once classes begin.
If you plan to give your child any spending money, now's the time to tell him how much to expect. Then, make sure you're clear how you expect that money to be used. If it's only for books and food, he needs to know that now.
Also, if you're the type who doesn't plan to bail your child out of a sticky financial situation, make sure that comes across now. You'd be surprised how many college kids think all they have to do is pick up the phone to get more money.
After working out a budget and disclosing your contribution, it may become clear that your child will need to find some employment. (Don't worry, it's good for kids to work!) If you're worried that she may also need some time to get used to her new classes, you can always front her some extra money during the first semester. Just be clear with your expectations. If the excess money will stop flowing in the spring, tell your daughter now that she will eventually need to find a job.
Credit Card Rules
Everyone treats their credit cards differently. Some people pay off their balances in full while others just write checks for the monthly minimum. No matter what camp you fall into, you'll do your kid a huge favor if you teach him that it's best to use his card sparingly and to only buy things he can pay off in full at the end of the month.
Also, make sure you explain the importance of paying a credit card bill on time. While most adults are aware of the late fees and higher interest rates that come along with late payments, college kids probably are not.
If you haven't lost your child's attention yet, make sure you add in a small lecture on credit scores. If you aren't too sure how they work yourself, look it up online first and then share the information with your son or daughter. Just remember that if your child makes some stupid financial mistakes now, it could stay on a credit report for up to seven years. Not only will future creditors see the black marks, so too will potential employers.
Too Much Credit image by Andres Rueda, CC 2.0.