| |
|
|
|
|
| The Basics | Keeping an eye on Junior's charge habits
|
Credit-card companies are developing programs to help you see how your kids are spending money. But don't forget to teach them the basic rules of credit.
By Terry Savage
High school and college students headed back to school are faced with all sorts of temptations that worry parents: drinking, drugs and sex. But far too often, parents don't realize that their teen will be faced with another demon -- the dangers of credit-card debt.
It's estimated that two-thirds of all college students have credit cards. In fact, college students are prime marketing targets of banks that issue cards. They know that students typically will have good jobs after graduation, or that their parents are likely to bail them out of excess debt. So along with campus tables offering signups for football tickets and logo t-shirts, students are likely to be handed enticing credit-card applications. And those cards don't require that a parent co-sign.
Now there's nothing inherently wrong with using credit cards. In fact, it's hard to imagine living without a credit card available for convenience, or in case of emergency. The problem arises when students get credit cards without having any basic training in how to use credit wisely. Unfortunately, money management is not a required subject for high school students. So here's a Money 101 for students -- and an introduction to some offerings from Visa and MasterCard designed to blunt criticism of their past marketing techniques.
Lessons on borrowing
Lesson 1: Graduating from college with student loans means you've made an investment in your future. Graduating with credit-card debt means you're throwing your future down the drain. In spite of well-publicized college dropouts like Bill Gates, there's little doubt that, for most people, a college education repays the cost many times over. It's been estimated that a college degree is worth 40% more in income over your lifetime. That's a gap that's bound to widen as the need for a well-educated workforce places a greater premium on an advanced degree. So it's definitely worth taking on student loans to finance your investment in college.
On the other hand, charging purchases that are consumed before the bill arrives, or worn out before you get your degree and finish paying the bill, makes no sense at all. Minimum payments are seductive. But if you're paying the minimum on a $2,000 credit-card bill, at 19.8% interest, and $40 a year in fees or late charges, it could take as long as 32 years and two months to pay off that bill! And you'd throw away $8,200 in interest charges.
That's a Money 101 lesson that many members of the Your Money community lament they never learned until they were buried in debt and interest charges. Just check the message board and you'll see how painful it is to learn the hard way.
Lesson 2: Your credit report follows you longer than your grade transcript. When you graduate from high school or college, your grade point average is typically helpful only once: when you take the next step. High school grades count for college. College grades count for grad school, or perhaps the first job. Ten years later, nobody's asking whether you got an A in English or History. But your credit report follows you for at least seven years, and as long as ten years if you really mess up. Every time you're late paying a bill or default on a charge, the card issuer is reporting your action to the three major credit bureaus. And you'll pay for your mistakes when you need to borrow the next time, whether for a car or a mortgage, or even when being evaluated for auto or life insurance. Some employers even pull a credit report when you apply for a job!
Lesson 3: Credit convenience doesn't have to be costly. Recognizing that students need the convenience of credit, but might not have had basic lessons in money management, Visa and MasterCard offer a reloadable debit card that allows parents to track student spending on the Internet.
The Visa and MasterCard offerings are available only online (see links at left under Related Sites). Parents can sign up for one of these cards, which works much like a prepaid phone card. The line of credit is the amount of a deposit made by the parent into a special account. The student can then use the card to make purchases or for cash withdrawals at automated teller machines (ATMs).
Those transactions are posted on the Web site, where the parent can access them at any time using a secure personal information number (PIN). Thus, last night's beer party or yesterday's shopping excursion is fully visible to the parent putting up the bill. Parents can "reload" the card with more cash at the same secure Web site. Or it can be reloaded using a touch-tone telephone -- perhaps after a serious discussion with the student.
Visa and MasterCard have each offered helpful brochures to help parents start talking about money management with their back-to-school teens. There are guidelines on setting up budgets and planning spending for the year, and information about credit reporting.
The Final Exam
If your student has learned these lessons well, there should be no problems with credit-card debt in his or her future. But the real-life final exam will come every day -- when your teen makes smart money choices in the classroom of life.
|
|
|
|
|
|
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.
|
|
