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Students and Credit Card Debt

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Pros and Cons

Should your college freshman apply for a credit card? Maybe. If you look on the bright side, getting a credit card can help establish a credit history, assure some security in an emergency, and teach your kids lessons about responsibility and independence. The dark side? A credit card is a quick way to create long-lasting debt.

Once your high-schooler has been accepted to college, your mailbox is likely to bulge with credit applications. Credit card companies offer such irresistibly low rates that two-thirds of today's college students have at least one credit card. Make sure your kids are aware of the risks that come along with plastic. Fill them in on the following points:

  • When you use a credit card, you're borrowing money from the credit card company to make a purchase. You'll then receive monthly statements that list the charges and request payment of this "loan."
  • A credit card isn't free money.
  • You should only charge what you can afford to pay back.
  • Credit cards shouldn't be a money substitute for items you can't afford.
  • Charges should be paid back on time, since when bills aren't paid in full, the outstanding balance collects interest charges.
  • It's important to pay bills in full, but when that's not possible, an amount more than the minimum payment should be paid.
  • If you pay just the minimum due you are not reducing the amount owed, since interest charges are accruing.
  • Always notify card issuers when you move so that account statements can be delivered promptly, avoiding additional fees and interest payments.

    Establishing Credit

    Help your kids understand that their credit record, just like their school transcript, can have a lasting impact on their lives. While the grades in a transcript reflect academic performance, the credit payments, debt, and income recorded in a credit history show the level of financial responsibility.

    As a financial resume, your children's credit history will be taken into consideration when they want to get a loan, buy a car, rent an apartment, get a job, or buy a house. A strong credit history is vital to a good financial future.

    With student loans and credit cards, college students can start a good credit history by establishing their ability to manage and repay debt. To help maintain a good credit history, remind them to:

  • Live within a budget,
  • Pay all bills on time.
  • Keep accurate records of all finances.
  • Carefully track how much is being charged to avoid overspending.

    Five Signs of Overspending

    Teach your kids to identify these signs of overspending:

  • Always paying bills late.
  • Only making the minimum payment on a credit card.
  • Exceeding the credit limit.
  • Working overtime to keep up with credit card bills.
  • Using one credit card to pay off another.

    To learn more about the pros and cons of ATM cards, and to help your kids create a budget for their college expenses, visit "Money Talks," sponsored by MasterCard International and College Parents of America.

    More on: Family Finances

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