In this lesson:
College students tend to learn about finance on an "as needed" basis As first-year-students, freshmen probably don’t yet need to understand the details of investing or long-term financial planning, but they should be prepared for higher finance by the time they graduate. What they should know, and what today’s college students are most interested in learning about, are strategies for saving money, options for paying for college, and budgeting.
Before your student makes any decisions about where she will do her banking, take time to talk to your student about how finances will be handled within the family. If you will be transferring funds periodically, let her know how and when that will be done.
The college or university may encourage students to use a bank, credit card, or debit card affiliated with the school. Those school-affiliated banks often will entice students with a free school sweatshirt or other incentives. Often students think they are required to have a campus-area bank. That is not a requirement.
Tip: Before your student opens a campus-based account, it’s important that you know what it will mean for you in transferring funds, or for your student in accessing funds when she’s home. As a family, you need to compare fees and cash transfer availability between the school’s preferred bank and other options.
A few statistics about debit cards: 85% of college students have debit cards. Those who use their debit cards make an average of 18 purchases on their cards each month; 19% use their card daily.
Bank debit cards have replaced cash and checks as the most common payment method for college students. With electronic banking, transferring funds has become increasingly efficient, and the location of the student's account is less critical. In emergencies, it can be quickest and easiest for parents to transfer funds from their hometown bank account into their student's account at the same bank, making funds available to the student.
Not all banks or all accounts can be accessed nationwide or at the same cost. A debit card from home might incur extra fees at an ATM on campus; that campus-affiliated card might be more costly to use off campus or away from the college town than in the student union.
Tip: Make sure your student understands the terms of the debit card. With your student, review the terms and fees for his/her account. Are there charges for using a debit card? Is there a fee based on the number of transactions per month? Are there maintenance fees? If the student forgets how much is in the account, will an overdraft (and fees) be automatically applied? Is that what you want? Can you change the default? Would a prepaid debit card make more sense than a debit card attached to a bank account?
The primary reason for a credit card during college should be to manage emergencies. Parents should make clear what they regard as an emergency—and preferably that should not mean, “I didn’t have enough cash to go out with my friends last weekend.” When a student is facing what they think is an emergency, they should ask themselves a few questions:
- Is there some way, other than putting the debt on my credit card, to handle this?
- Where will I get the money to pay this at the end of the month?
- If I can’t pay the debt within a month, am I prepared to make payments over time? Where will those funds come from?
- If I have to ask my parents to help pay this off, are they going to understand?
Other key reasons for college students to have a credit card:
- They help students establish credit and learn financial responsibility.
- Credit cards are convenient and often are safer than cash.
- For students studying abroad, credit cards are often described as a necessity.
- Credit cards are the safest option when ordering from Internet sites.
Credit cards have their drawbacks as well, though. They can lead to a bad credit rating. Students could be saddled with major debts and high interest payments. Financial problems could cause students significant stress and, at the extreme, may lead to health problems or dropping out of school.
Federal legislation that went into effect in 2010 put restrictions on credit cards for college-aged students. Credit card issuers are now banned from issuing credit cards to anyone under 21, unless they have adult co-signers on the accounts or can show proof they have enough income to repay the card debt. Credit card companies must stay at least 1,000 feet from college campuses if they are offering free pizza or other gifts to entice students to apply for credit cards.
Nevertheless, college students continue to receive solicitations, and the restrictions are proving simple to work around. By some reports, students are using their student loans as evidence of income to qualify for a card, and anyone over 21 is eligible to serve as a co-signer--not just parents.
Parent: "We were greatly disturbed last week when we found out our son recently received two new credit cards, one rejection, and one acceptance that needed more information. We told him we didn't want him to have any credit cards, and he agreed because of two friends he has. One has struggled with credit card debt because of the ease of purchases ever since starting college. The other kept telling his friends not to let him charge another thing because he couldn't handle it. He finally had a store clerk cut up his card for him. I don't believe a college student is in a very good position to have credit cards, as their expenses are so high and income pretty menial. Getting in debt comes so fast and easy; getting out is a long process. We are dead against his having a credit card."
While there are credit card providers that will work with new card holders to teach good practices, there are also some providers that charge sign-up fees, make it difficult to understand their terms, or establish barriers for easy payments. Students need to be alert for the conditions of any credit card offer they are considering.
Parent: "My daughter was victimized by a company that had their processing headquarters in Iowa but their bill payment address was in California. Their customer service and charter were in Delaware. They claimed they didn't receive her payments on time, even when she mailed the payment on the same day she received the bill. Unfortunately, I didn't explain to her what types of scams could be out there. We did discuss the dangers of credit card debt and how it can quickly overwhelm a person."
Tip: Used carefully, credit cards are not a problem. Be alert for signs of trouble when students
- Don’t fully understand the terms of their card
- Sign up for multiple credit cards in order to get the purchase points or other incentives
- Use credits cards for everyday expenses and small purchases
- Have one or more cards at their maximum limit allowed
- Pay only the minimum on their credit card bill each month or fall behind on payments
- Apply for and use multiple credit cards to stay under maximum charges allowed
- Have a different interpretation than their parents of what constitutes "emergency" use of the card
Different families choose very different methods for encouraging good practices related to debit and credit cards. Some parents put their student on an account in the parent's name, and the billing statements are mailed to the home address. Some parents ask their student to clear purchases with them before using the debit or credit card; in an emergency, the student may use the card, but must notify the parent as soon as possible afterwards. Each month when the bill arrives, some parents and students review the charges together.
Parent: "When the girls were seniors in high school, I arranged for them each to have a credit card. The No. 1 rule was that it was paid in full every month. If they needed something for school or a special outfit or gas for the car, they would charge it. I was usually asked in advance if they could charge. When the bill came, we would go over it and decide which charges they or I were responsible for. They also had a checking account and savings account. In order for them to have practice in handling their money and accounts, I would give them a check to deposit into their account to cover my portion of the credit card bill. Then they would write the check out to cover the credit card bill and mail it. I also would have them help me on occasion with paying the family bills -- things like balancing the checkbook and keeping the ledger of monthly expenses."
Other families give their student more leeway in deciding what to charge or how to use the card.
Parent: "We discussed financial responsibility with our daughter before she started college this fall. We got her first credit card with only a $500 limit and plan to keep it at that. We made it clear she was responsible for certain items, such as entertainment, some clothing, etc., and made clear what we would pay for. To this point, she is doing pretty well."
Tip: Students--and parents--may not think credit scores (FICO scores) are relevant to college students, and they might believe that college students don’t have credit reports. Credit scores are like the student’s GPA—a number that represents their overall “credit worthiness,” whereas a credit report is like the student’s academic transcript—a detailed history of all their credit-related financial transactions. Anyone with a credit card will have a FICO score, and they are gaining a credit rating, whether they want to or not. When students know their score, they often think about it like a grade point average--it’s an indication of how they’re doing, and they can either improve it or lower it based on how they perform throughout the year.
Activity: Check your credit score.
To get an idea of your own FICO score (your credit rating), or your student’s score, this website will provide an estimated range:
Estimate your score
A more specific free annual credit report is available here.
Although you can get a free copy from each of the three reporting agencies once each year, spread it out over the year (e.g. quarterly) to monitor your credit reporting history.