Talking Credit with Your College Freshman

How to broach that touchy subject without getting on your teen's nerves.

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When your child begins his first year of college, he’ll face his fair share of emergencies, make tough decisions that will affect his life from here on out, and have more freedom than he could have ever imagined. Before you drop him off at his dorm, you’ll need to have the talk…about credit cards.

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You can’t avoid plastic. Fewer and fewer people use cash, preferring instead the convenience of debit or credit cards or eschewing physical methods altogether with online payment systems. And having a credit card is about more than just convenience: your newly minted college student might well find herself in a situation where she needs more emergency cash than her checking account or wallet can provide. What’s more, having a credit score is essential in the post-college world. Your child will likely need a payment history to rent her apartment, qualify for an auto loan or mortgage, get lower insurance premiums or even find her first job.

But carrying a credit card is not without risk, especially for the unprepared. Here’s some advice on how to have that first conversation on credit cards and get your child ready for the wide, wild world of personal finance.

1. Under the limit, under control

Your child’s first credit card doesn’t need to have a $10,000 credit limit. Be careful to give your child only the responsibility he can handle, instead of letting himself ruin his credit score before he even has a chance to create one. Explain that he won’t be allowed to spend more than his limit, and if he brushes up near the limit, he’ll risk hurting his FICO score. Also explain the importance of paying off his debts every month, and if he does carry a balance, tell him that as attractive as 2 percent cash back may seem, a low interest credit card will serve him better in the long run.

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2. Let’s talk FICO

College is the time to begin building a credit history, so that later on your college student can get favorable rates on auto loans, student loans for grad school, and eventually a mortgage. Talk about the components of a good credit score: a low debt utilization ratio, or how much you owe compared to your credit limit; a solid history of on-time payments, which is the single biggest component of your credit score; and that different kinds of debt factor differently into your FICO score (too much credit card debt, for example, hurts your score, while “installment” debts like student loans aren’t necessarily negative). You can get your credit report for free once a year; request a copy of yours and your child’s, and walk him through the report.

3. Explain the co-signer process

If your child has no other source of income, you’ll have to co-sign her credit card. The Credit CARD Act of 2009 requires everyone (not just college students) to have either a steady source of income, or a co-signer who has the financial wherewithal to guarantee the loan. Tell your child that even though your name is also on the line of credit, he’s helping to build his own credit score. Also explain the responsibility that goes along with a joint loan: if he doesn’t make good on his debts, he’ll tarnish your FICO score as well. Sometimes knowing that you are responsible for another person’s well-being is all you need to stay on the straight and narrow.

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4. Choose a credit card together

Once you’ve explained the freedoms and responsibilities that go along with having a credit card, it’s time to talk about getting the right one. There are many student credit cards that reward typical student purchases, like textbooks, music or movies. Take a look at the selection of rewards credit cards to find one that matches her spending habits. However, if he will carry credit card debt month-to-month, his best option is to choose a low APR card that will minimize is interest payments. Talk to your soon-to-be college student about your own credit card and how you chose it. Explain the terms of your card, from the annual fee to the rewards to the interest rate, and be sure to touch on the “shrouded” fees like late payment, cash advance or foreign transaction charges. With a little help from Mom and Dad, your college student will ace the transition to financial independence.

Tim Chen is the CEO of NerdWallet, a credit card website dedicated to helping students and their parents find the best rewards credit cards.