When you send your kids off to college, they may have a laptop, a mini-fridge, and some new clothes. And many freshman are also carrying their first credit card. There are pros and cons to handing a young adult a credit card, and the advantages often outweigh the disadvantages. There are also some cards that are better suited to young people than others.
Why credit cards are good for young people
Parents most often give Junior a credit card because it will be handy in an emergency, will make it easy for him to pay for things without carrying around a lot of cash, and will help him develop some money management skills. Further, these days a lot of shopping is done online, where cash is not king.
Another excellent reason is that owning a credit card enables him to start establishing a credit history. Later in life he will want to borrow money for a mortgage or car loan, and the credit score that influences his interest rate will be based partly on how long and how responsibly he has used credit.
An upside for parents is that if they've cosigned on the card, they should receive monthly statements, too, and can keep an eye on their kid's spending. If $300 is going to Bruno's House of Pizza every month, they can bring that up.
Why credit cards are problematic for young people
Of course, there are downsides to collegians carrying credit cards, too. For starters, remember that many students graduate with significant student loan debt, and overspending on credit cards can add to an already heavy debt burden. (One study estimates that among class of 2014 grads who have student loans, the average owes $33,000.)
The goal of building a strong credit history early can be thwarted if bills aren't paid on time, as that lowers a credit score. (If a parent cosigns for the card, then the parent's credit score can take a hit, too.) The cards themselves are problematic, too, with many bearing steep interest rates (often after a low teaser rate expires) and annual fees.
It's also important for young people to learn how to save, and that can be hard if it's easy to spend -- or if all extra cash is going toward debt repayments because debt has piled up.
What to do
Some parents choose to start their kids off with debit cards so that money management skills can be learned without the risk of debt. But if credit cards make more sense to you, here are some tips.
Set ground rules and expectations. For example, you might expect your child to pay off each month's bill on time, and you might limit the card's use to school-related expenses (such as books) instead of entertainment. Have a conversation about using credit cards wisely. Point out the danger of steep interest rates and fees, as well as the importance of keeping cards secure and not using them online on public networks, lest your kids fall prey to identity thieves.
Some cards to consider
Below are a few of the credit cards recommended by the folks at CardHub.com, who "reviewed more than 1,000 credit card offers to find which cards offer the most significant savings and rewards while teaching college students the importance of money management."
- Journey Student Rewards from Capital One: 1% cash back on all purchases plus a 25% bonus on your cash-back reward for paying your bill on time each month; net 1.25% cash back for every dollar you spend; no annual fee.
- BankAmericard Cash Rewards for Students: 3% cash back on gas and 2% on groceries (up to $1,500 of combined net purchases in both categories); 1% cash back on everything else; online-exclusive $100 initial rewards bonus for spending $500 in first 90 days; 10% bonus when redeeming rewards as direct deposit to a Bank of America savings or checking account; no annual fee.
- SunTrust Secured Credit Card: For students planning to charge more than $325 per month, this secured card will more than pay for its $39 annual fee. Offers 2% cash back on gas, grocery, and drug-store purchases for the first 6 months, and then 1% cash back on all qualifying purchases thereafter.
- Capital One Secured MasterCard: Security deposit as low as $49 for $200 credit line; $29 annual fee.
When deciding whether to give your kid a credit card to use, think things through carefully. Depending on how its used, a credit card can either make or break the owner's financial standing.
Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.