Should a freshman in college have a credit card?

August 24, 2012

Should you send your child off to college with a credit card? Opinions are divided, both among parents and financial advisors. It’s a situation that can work out really well or really badly, depending on the student and the parents.

At its best, everyone benefits from giving a student a card. The student uses the card for budgeted expenses, pays off the balance each month, and starts building a good credit history. The parents sleep better knowing the student has a credit source in case of emergencies.

At its worst, the student is unused to managing money or living within a budget. The student fails to make payments on time, incurs high interest charges, and ruins his or her credit history. The parents have to step in to bail the student out.

Among the risks:

* Lack of experience in managing money can lead a student to overspend or to neglect making payments on time.

 * Peer pressure may encourage a student to spend on entertainment or clothes, just to keep up with friends.

 * Failure to agree on a budget beforehand can result in shock when you see your student’s monthly statement.

 * Parents co-signing for the card can put their credit scores at risk, too.

 * Loss or theft of the card can lead to problems that take time to resolve.

 To minimize risks:

* Set ground rules for use of the card. Agree on what it may and may not be used for. Put the agreement in writing and have the student sign off.

 * Establish a budget. Talk regularly about how your student is managing his or her expenses within the budget.

 * Consider alternatives to a credit card, at least for the freshman year. Consider using a prepaid credit card, or set up a checking account with a debit card. That allows the student to gain experience managing expenses within a budget.

Finally, remember you may have no say in the matter. Students are bombarded with credit card offers as soon as they enroll. Card companies are usually happy to issue a card to any student over age 18 in his or her own name.

 

Leave a Comment » | August 2012 | Tagged: , , , , , , , | Permalink
Posted by gillilandcpa

Three habits can keep you out of debt

July 15, 2011

Staying out of debt is simple, but it’s not easy. It requires fortitude. It means foregoing impulsive purchases in exchange for long-term financial freedom. Staying out of debt requires that you deny cravings, at least temporarily, for the “must-have” stuff that beckons from every mall, television advertisement, and magazine.

 Personal debt can be categorized as necessary or unnecessary. Necessary debt can generally be linked to assets such as your home mortgage, a basic car for getting to work, or a college degree. Unnecessary debt, on the other hand, might include routine credit card charges or installment loans for items that rapidly decline in value.

 If your goal is long-term financial freedom, avoiding unnecessary debt is crucial. Three simple habits can help you achieve this goal.

 1. Live below your means. Much of the stuff that seems so essential today will, in fact, grow less desirable over time. Of course, living below your means requires that you discover what those “means” are. For many people, this means tracking your income and expenses over a period of time  -  a month or more  -  to learn where your money comes from and how it’s spent. You might be surprised. That cup of gourmet coffee on the way to work, that weekly meal at the fine dining establishment, that car payment for the latest sedan  -  all cut into your disposable income. By spending less on such items, you’ll be able to save for the future and develop long-term wealth.

 2. Save for emergencies. By setting aside money in easily accessible accounts, you avoid racking up credit card bills when unexpected expenses occur. Such expenses could include trips to the emergency room, replacing the water pump on the family car, or patching a hole in the roof. A reserve fund can also help you survive periods of unemployment without incurring additional debt.

 3. Use debt wisely. If you decide to incur debt, know what you’re doing. Slow down, take a deep breath, think about how valuable this item will seem three months from today. Also ask yourself whether you can pay off these new charges out of next month’s income.

 Staying out of debt isn’t glamorous, and it requires more than a little self discipline. But the long-term benefits are substantial. If you’d like additional suggestions for developing habits of financial discipline, give us a call.

Leave a Comment » | July 2011 | Tagged: , , , | Permalink
Posted by gillilandcpa

New credit card rules go into effect

March 23, 2010

The new “Credit Card Accountability, Responsibility and Disclosure Act of 2009″ (CARD), which is designed to protect consumers from unfair credit practices, generally took effect on February 22, 2010. Here’s a summary of several key provisions.

* Introductory rates offered by credit card companies must remain in effect for at least one year (six months for promotional offers). Consumers must receive at least 45 days’ notice (instead of the current 15 days) before a rate hike. (This provision became effective August 20, 2009.)

* Companies will be required to mail credit card statements at least 21 days before the due date (seven days longer than before).

* Issuers can’t raise rates on an existing balance unless you’re late by 60 days or more.

* Credit card payments will be applied to debt with the highest interest first.

* Double-billing cycles, the practice of basing finance charges on both the current and previous balance, are banned.

* To reduce “over-the-limit” fees, companies must obtain a cardholder’s permission to process transactions above their personal limit.

 * Consumers must be notified how long it will take and how much it will cost to eliminate debt through minimum monthly payments.

 * Applicants under age 21 won’t qualify for a credit card without showing an ability to pay or a co-signer.

 * Statements must prominently display fees paid to-date as well as explanations for those fees.

Leave a Comment » | March 2010 | Tagged: , , , | Permalink
Posted by gillilandcpa

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