Credit is used for everything these days, whether the purchases are big or small, such as a house or car, school loans and even lunch. It’s easy to see how, without the proper understanding of how credit works, a college student could make mistakes that could affect them for a while.
That’s why parents should take the time to teach their children how to understand and use credit wisely – preferably before they head off to college.
A good place to start is by teaching students how credit works and to allow them to start building a credit history when they enter college, said Beth McSweeney, assistant vice president and campus relations manager for Greater Maryland at PNC Bank, a role in which she works directly with colleges and universities on student loans.
Parents who don’t help their children establish a credit history may be putting limits on them, she added.
“Allowing students to have access to some credit teaches them how to budget and it teaches them responsibility,” said McSweeney, who also worked in the post-secondary financial aid industry for 10 years and often provides financial guidance to PNC customers who are sending a child to college.
For example, a credit card account can offer an opportunity for a student to start to establish a credit history, provide peace of mind for parents that their child has a means to pay for unexpected expenses and allow parents to monitor their child’s spending.
However, McSweeney cautions that parents will need to set boundaries. If the parents are a responsible party on the credit card account, they should allow their student to have access to a very small credit line. In addition, set consequences for charging unnecessary items and explain to your child what charges they’ll be responsible for repaying. It is essentially a conversation about needs vs. wants.
“When I counsel families, I hear students talk about their spring break trip or wanting a new TV,” McSweeney said, adding that those are big ticket items that students shouldn’t be buying with credit cards or loans.
As students begin building credit, parents should teach them about the credit score, which is basically a grade, McSweeney said. As a grade on a test is considered a measure of how well a student understands a subject, a credit score shows creditors how likely a borrower is to repay debts. The higher the credit score, the more financially dependable the person is deemed to be. And that can make all the difference when applying to borrow money in the future.
Technology has enabled businesses of all kinds to quickly pull up a credit report and score. A credit score can determine whether a student qualifies for a lower interest rate on a car or whether they can rent an apartment and eventually buy a home.
The higher the credit score, the easier it is to qualify for loans and sometimes at a lower interest rate.
Believe it or not, a credit score also can play a role when job searching and could be a factor in whether one lands that coveted job. McSweeney noted that many employers now review credit scores when they consider job candidates.
Credit can be an overwhelming subject, especially once the consequences are explained, but there’s one way to stop your child from rolling their eyes. Share your own experiences.
Most people learn about credit through trial and error, and parents are no exception. Parents should talk about how their own credit score may have been impacted by applying for too many credit cards or accumulating debt they couldn’t repay. This proves parents are human, too, and shows it is possible to overcome mistakes.
When McSweeney counsels families about college financing, the student often expects her to say she never made mistakes and that she has always had perfect credit. Once she tells them that she, too, learned the impact of credit the hard way, the student often softens up and is more willing to listen.
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As the student gets older, it’s wise to keep one credit card for a long time to show length of credit history, which is a factor when a credit score is being determined.
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