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Credit Advice for College Freshman

Karen Gibbs

Karen, my daughter is starting college this fall and I want to make sure she’s financially responsible.  What is the best way to teach her about credit?

- Dina, Cecil County

 Student Budgeting
Dina, this is great opportunity to teach your daughter about the importance of managing credit responsibly while helping her make the first step toward independence, financial and otherwise.

Before the financial implosion of 2008, credit card companies flooded college campuses with credit card applications.  It was almost like free money in every mailbox.  The temptation to open and use many credit cards doomed many a college student and plagued them once they entered the work world, saddled with high interest rate debt along with student loan debt.  Being this deep in debt can be a heavy burden than can hobble financial security for years to come.  The 2010 Credit Card Reform Act put an end to the slew of credit card offers and made income verification mandatory.

I would discourage your daughter from opening these credit card offers and, instead, consider placing her, as an authorized user, on one of your credit cards.  This way you can monitor her usage and help her develop good financial habits.  Make sure you set reasonable guidelines and spending limits.  Remind her that cash is legal tender and is another, sometimes cheaper, way to make purchases and limit credit use.

I’m also a big fan of checking and savings accounts.  Most banks offer a debit card to access accounts 24-hours a day.  Help her create a budget, hold her accountable for her spending and applaud her for responsible spending and saving habits.

Another option is a secured credit card.  It is “secured” with a deposit upon which she can draw.  You can add money to this secured card at any time, but understand the fees that are associated with the card:  administrative fees, processing fees, maintenance fees, etc.  Look for the card with the lowest fees and make sure the card reports to a credit agency to help her build her credit history.

Retail store cards are another way to establish credit.  They are easy to obtain, often at point-of-purchase transactions, and may come with perks such as discounts and early sale notification.  They do, however, carry a higher interest rate and could tempt her to spend more than she had planned.

If your daughter is employed, she can open her own credit card with proof of income.  The fewer credit cards the better, so make sure she does her homework.  She should understand the interest rate – is if fixed or variable?  Is there an annual fee?  What is her credit limit?  Is the billing policy clear?  Does it offer a grace period?

Which ever method you and your daughter choose, impress upon her the importance of using credit responsibly.   Start with small, recurring charges that she can pay off in total every month (something like her cell phone or Netflix bill).  Don’t co-sign for anyone or let anyone use her card (or add them to her phone plan).  Make sure she reads the fine print and knows her rights and how to dispute and correct errors.

Best of luck to both of you!

 - Karen

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