When setting up your student for success in their first year of college, there are likely many questions your family is considering. What needs will they have? What kind of access to transportation or services will they require? In addition to tuition costs, room and board, and books, what financial assistance will they need?
Many families explore setting up an allowance for their college student in order to address some of these questions, either funded through a checking account and debit card or credit card. If the latter, there are a few considerations college students and their families should keep in mind.
Let’s talk about the advantages and disadvantages of having a credit card while in college.
The Pros
When managed carefully, credit cards can be valuable tools for college students to use. Here are a few reasons why.
Building Credit
For many students, college is an important introductory season to financial adulthood. Having a credit card is an opportunity to start their credit history and begin building a healthy credit score, which is essential for future needs they may have, such as renting an apartment, buying a car, or even securing certain jobs.
Learning Financial Responsibility
If your student is ready to learn about money management, credit cards can provide a hands-on means of exercising those skills. With proper guidance, they can understand more about how interest works, how to manage timely payments, and how to budget monthly expenses. Lifelong financial habits, as well as other educational or professional lessons, can start right here in college for them.
Enjoying Rewards and Perks
Many credit cards, including products specially designed for college students, often offer reward programs. Perks like cashback or reward points can help students make informed decisions about everyday spending while potentially earning discounts or saving money along the way.
Peace of Mind for Emergency Use
The bottom line for every parent is knowing that their child is going to be okay when faced with an unexpected challenge. A credit card can offer a kind of safety net, giving your college student access to funds when they may not be able to access cash or savings. You may want them to have another means of support in case of a late-night flat tire or trip to the emergency room.
The Cons
If not used responsibly, the risks of using credit cards may outweigh the benefits. Here are a few outcomes you may want to avoid.
Risk of Debt
The most important downside of student credit cards to understand is the potential to accumulate debt – which, as we’ll discuss later, may be hard to recover from. Without sustainable financial habits or a reliable means of paying off purchases, your student may struggle to pay off the balance they accrue.
Encouragement of Overspending
For some, credit cards may create a false sense of financial security. If their budgeting skills fall short and your student begins to live beyond their means, the outcome may be a significant level of financial stress down the line.
Negative Credit Impact
Maxing out a credit card, making late payments, or missing payments can negatively impact the cardholder’s credit score. If your college student isn’t ready for the financial responsibility of having a credit card, poor credit may affect their future financial opportunities.
High Interest Rates
The kind of credit cards that are often marketed to college students or adults with a limited credit history may come with high interest rates, since the lender is assuming relatively more risk than for a cardholder with a long, healthy credit history. As your student’s credit card balance grows, so do the interest charges that come with it, which can quickly increase the total amount owed.
Final Considerations
Arming your college student with a credit card can be a tempting option when considering their needs during the semester or year ahead, but be sure to have realistic conversations about how to manage their spending and payments if you decide to go this route. If you’re concerned your college student may not be ready for this step, that’s okay! There are other options you can explore to set them up for success.
Using a credit card for school-related costs – such as textbooks, lab instruments, meal plans, or housing – may not be the most effective choice. Instead, consider covering the gap of school costs with a private student loan, which is designed to help borrowers manage repayment with a structured payment plan at a more comfortable interest rate.
For more questions about this option, ELFI is here to help! Contact us to learn more about private student loan options for undergraduates and parents today.
