Many parents start to ask this question when their child is about to start college. I’ll give you the simple but vague answer right away – you should at least consider the possibility.
The more complex answer: It really depends on why you/your child wants it and the nature of your child’s financial literacy, prudence, and money mindset. Let’s get right to it. Here are the pros and cons of your college student acquiring their first credit card:
Pros of Getting a Credit Card in College
1. Ease of Application – Many student credit cards are designed for those who have no credit or limited credit. If you wait to apply for your first credit card until after college, you may have more trouble getting one. If you graduate with no credit or poor credit, you will likely have to start with a secured credit card or credit builder card without many perks.
2. Build Credit Early – This is one of the biggest pros for acquiring a credit card in college or letting your child be an authorized user on one of your credit cards. When it comes time for them to buy a car, rent an apartment, or purchase a home, having a good credit score will benefit them. Unfortunately, most people wait until one of these events happens, and parents are then needed to co-sign.
3. Walk Through the Fire – This can easily be a con depending on your child’s personality and maturity. Some parents and financial experts might argue, however, that it is good for students to have a credit card to learn fiscal discipline and budgeting through actual practice and real-world consequences.
4. Rewards – These are not a good enough reason to take out a credit card as a student, but they are a nice bonus. Off the top of my head, I know that the Discover Student Cash Back Card offers 5% cash back on rotating categories and matches your cash back in your first year. The Capital One SavorOne Student Card offers great cashback rates for dining, entertainment, and streaming – the trifecta of the college student experience some might say.
Cons of Getting a Credit Card in College
1. The Pre-Frontal Cortex Conundrum – We know for a fact that the “rational” part of the brain does not fully develop until the mid-20s. Teenagers making decisions based on emotions is a stereotype for a reason – they are more impulsive and present-focused because of how their brains operate.
Do you think your child will have the presence of mind to pay off their statement balance each month and not spend money they don’t have on things they don’t need? Will they learn about and avoid actions that will hurt their credit score or their borrower reputation (e.g. keeping credit utilization low/not maxing out their card)?
More importantly, does your child think they can handle having a credit card?
2. The Debt Snowball – If your child carries a balance on their credit card from statement to statement (i.e., they are spending more than they make per month), they are playing a dangerous game. Interest rates on credit cards are variable and can be as high as 25%. Credit card debt can be a massive hole out of which to dig yourself, especially if you are a college student with no real means to increase your income.
3. Credit Score Catastrophe – What’s worse than carrying a balance? Missing payments entirely. Not only will you be charged a late fee, but your credit score will also take a hit. Extended missed payments can jack up your interest rates and can remain on your credit report for seven years.
4. The Invisible Free-Money Mentality – The passive cultivation of this mindset is completely understandable when using a credit card. With no physical money exchanging hands, your student may lose a sense of what they’re actually spending. To make matters worse, irresponsible credit card users will pay for a large expense, thinking “I’ll cross that bridge when I get to it in a month.” Yes, credit cards give you breathing room, but they are not magical money dispensers.
Tips for Credit Card Usage
- Do not carry a balance. Always pay the statement balance in full.
- The minimum payment is a trap – it avoids the repercussions of missing a payment, but now you are accruing interest. If you are going to fall short on a payment for whatever reason, pay as much as you possibly can that month.
- Understand the main factors that build your credit score:
– Pay on time.
– Do not max out your credit card. Ideally, you want to keep your credit utilization under 30%.
– Credit history – the length of time you have credit lines open is a plus! This is why getting a card in college can be immensely helpful for the future.
A Note on Building Credit WITHOUT a Credit Card
If you want to wait on the credit card, there are several ways to still build credit:
– Pay off student loans on time.
– Use Experian Boost to report on-time bill payments.
– Allow your child to be an authorized user on one of your credit cards.
The Credit Card Readiness Pop Quiz: Let’s Test Your Knowledge
One of the best ways to get to the right solution is to ask and answer the question, “Why?” We use this strategy when helping families find good college fits.
So, let’s apply the same thought process to getting a credit card.
QUIZ: Here are several reasons why you or your child might want to get a credit card right now. Which ones are valid?
1. I want my child to build credit early.
Valid. This is one of the biggest pros of acquiring a credit card in college and the primary reason why one should apply.
When it comes time for your child to buy a car, rent an apartment, or purchase a home, having a good credit score will benefit your student. You do not want to be co-signing loans for your kids’ cars or lodging after they graduate. This places a greater risk on the parents that can be avoided with good planning.
2. I want to help my child learn fiscal discipline, budgeting, and credit responsibility.
Valid, but make sure your child is ready for this new responsibility.
While this is an admirable endeavor, a credit card can quickly turn sour in the wrong hands. One of the biggest mistakes Americans make is not being disciplined while using credit cards.
I often ask those I work with the following: if the item they purchased cost 20% more would they still purchase the item? Helping your child to learn how to be responsible with their credit card while they are under your roof may help prevent them from making some very poor decisions in the future.
3. I want to receive store discounts.
This is not a good reason to apply for a credit card, especially for a student who already qualifies for an abundance of store discounts just for being a student.
4. I simply don’t have the money to buy something, and I need it now.
As a general rule, you should never purchase anything you cannot pay off by the next month. This is how the debt snowball is created.
There’s a mild exception to this rule: many parents like their kids to have a credit card if there is a true emergency need where they don’t have time to give their kids financial assistance (e.g. urgent care/hospital bill)
Instead of their child getting their own credit card, parents might add their kids as an authorized user to one of their own cards. If you’re inclined to do this, you need to sit down with your kid and explain that this is for desperate situations only or a one-time purchase authorized by you.
Note: This is not a good idea for every family out there. Unfortunately, I find that most people confuse needs with wants. Young adults, especially, get impulsive and use money they do not have to go on trips or purchase comfort/luxury items. They often think they will have the money later to pay off the credit card, but they never do. If they know that you, the parent, will cover the expense, then they have even less incentive to be fiscally responsible!
5. It is a 0% interest offer.
May be valid for an experienced credit user who’s orchestrating a balance transfer or needs to make a massive purchase and just needs more free time to pay it off with their very large and stable income.
For college students, this should never be a reason to obtain a credit card but may be a perk of having one. If you have the money to make the cash purchase and you are disciplined to make the necessary payments to pay the credit card balance prior to the 0% promotional period ending, then it would be okay to benefit from this perk. Please make sure you understand all the fine print of the offer.
Several student credit cards do offer 0% APR promotions for 12 months or more. This can be a nice “buffer period” in which to make larger purchases, but you better have a plan for when that promotional period ends. Credit card issuers can also rescind the 0% promo if you are late on payments.
6. I want to earn points, cash, or miles.
Invalid for college students. But, it is perfectly ok to make this a factor in your credit card search once you find a valid reason for applying. While alluring to all, credit card rewards should only be a perk of having a credit card, not a sole reason to get a card. These perks are only of value to those who pay the full balance monthly.
And, frankly, the real gung-ho rewards cards are not realistic for the average college student (high annual fees, high credit score requirements, incentives to spend a lot of money, etc.).
Final Thoughts: Should My Child Apply for a Credit Card?
I do believe once a child turns 18 and is employed, they should consider obtaining a student credit card in their name. This allows them to establish credit while they are young and before they must make a major purchase. We want them to be able to make those major purchases on their own and not need a parent to cosign the loan.
This does not mean getting a credit card in college is right for everyone. Understand your child’s money mindset or psychology. If they have a dearth of financial knowledge, they need to learn how to handle this responsibility. Many kids don’t get a credit card in college simply because they know or fear they would misuse it.
As a reminder, remember to start with “why” and then follow up with questions such as these:
– Is my child responsible with money?
– Do they know how credit cards work?
– Does it make more sense for them to be an authorized user on our card?
Author:
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Relevant Reading:
Why You Need to Talk to Your Kids About Money
SECURE Act 2.0: Big Changes to Retirement and College Funding
The Road to 120: Graduating College in Three Years
Top Gun College Planning: What Aerial Dog Fighting Teaches Us About College Funding
Navigating Your Undergraduate Student Loan Options Wisely
Strategies for Sending Your Children to Private Colleges Despite the Higher Costs