As a professor at the University of Minnesota College of Education and Human Development (CEHD), I’ve researched many ways of teaching college students how to build good credit. Developing responsible credit habits is a crucial part of a college student’s financial education; in this article I’ll give parents and teachers some guidelines for teaching college students how to develop a good credit score.
The Benefits and Dangers of Credit Cards
We live in a plastic society. As online shopping continues to grow in popularity, the convenience offered by credit cards make them the preferred method of payment for most consumers. For college students, credit cards offer benefits and risks. On the plus side, they offer valuable fraud protection for online purchases, an easy way to track spending, a safety net for emergency expenses and a path to developing a good credit score for future big ticket purchases like a car or a home.
However, as we see too often, college students who misuse credit cards can be putting themselves at a disadvantage as they enter adulthood. Many run up large balances on high interest rate credit cards, then make only minimum payments each month. In this scenario, most rack up huge interest fees without making progress on paying down the principal loan – or worse, fall further and further behind each month. Late or missed payments can result in a bad credit score that will make it difficult to secure loans with good interest rates.
As parents and teachers, we no longer have the option of saying, “You’re not ready to handle credit.” Our children will be faced with important decisions regarding credit cards whether we like it or not, and it’s our job to teach them how to use credit responsibly. College is a time when our young people learn to become self-sufficient adults, and learning how to build good credit is an important part of that journey.
The Importance of Modeling Responsible Credit Habits
Despite their current ubiquity, credit cards have not always been the preferred method of payment. As recently as 20 years ago, most people wrote checks for their bills and purchases. The use of credit cards is a learned social behavior, and parents play a key role in shaping their children’s credit behaviors. This occurs in two ways:
- Modeling. My advice for parents who want to teach their college students how to build good credit is “show, don’t tell.” Show them your credit card statements and demonstrate the process of managing balances and payments. By using credit wisely, you set a good example for your child to follow.
- Setting expectations. When I was growing up, my parents made it very clear how they wanted me to behave. After you model how to manage credit responsibly, give them a clear set of rules and expectations. One way to start this process is by adding your student to your credit card account as an authorized user to observe their spending behavior, and to coach them before sending them off on their own.
How Credit Card Companies Target College Students
Don’t delay teaching your college student how to responsibly manage credit, because once they arrive on campus they’ll be hearing from credit card companies! In the past, credit card companies used tactics like setting up a stand on campus to give away prizes like free t-shirts or water bottles to students who signed up for a new account. These practices were so brazen that the students’ signature alone was often enough to obtain a credit card, or more than one card.
The 2009 Credit Card Accountability and Disclosure Act signed into law by President Obama was designed to rein in these practices. However, the reality is that credit card companies were quick to adapt, finding loopholes in the law in order to sign up college students. Banned from setting up on campus, company representatives simply moved their stands a few blocks away – or solicited through the mail. While students are now required to demonstrate their ability to pay, the law allows student loans to be counted as income – a financial shell game that can lead a student into credit trouble.
That’s why it’s important to talk to your students about how to use credit. If you don’t, the credit card companies surely will.
Six Tips for Teaching College Students How to Build Good Credit
We’ve learned a lot about how to teach college students about good credit habits over the years. We have a greater understanding about the factors that influence credit behavior – and have been able to use this knowledge to craft practical approaches to helping college students build good credit.
- Enlist their peers for support. In my efforts to educate college student about credit, I’ve found that they are more engaged with the information and situations regarding credit usage when told to them by someone their own age. At CEHD, I’ve created a group of student educators (called “Peer$”) to speak with University of Minnesota undergraduates and students in local high schools. This program has proven highly effective, as students are able to hear firsthand stories of our educators’ positive and negative experiences with credit cards.
- Ask them why they want a card. Students need to understand the purpose of the card. It’s not about having extra money to play with; it’s a financial tool to help them establish a credit identity – something that demonstrates to institutions that grant loans that they are becoming responsible adults.
- Determine whether they are responsible and ready. You need to know your child’s knowledge of credit and level of responsibility in other areas of life. Do they know the difference between a credit and debit card? Do they pay other bills on time? Do they go to class on time and get good grades? If they aren’t responsible in their academics, why would they be responsible with a credit card?
- Start small. It’s best to introduce your college student to credit gradually. You have a number of options: make them an authorized user on your card, help them obtain a secured pre-paid credit card that contains a set amount of money or a low limit ($500 or less) conventional credit card.
- Teach them to set limits. Encourage them to set limits on their spending. If they are going out on a Friday night to blow off some steam with friends, tell them to bring cash and leave the card at home.
- Help them understand peer pressure. In college, your child will interact with fellow students from many walks of life – many of whom come from more affluent backgrounds. Help them understand that some of their friends who have parents fully paying for their education and no student loans will be able to do things they can’t. Trying to “keep up with the Joneses” with a credit card can be a hazardous proposition.
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