As parents send their kids off to college – maybe for the first time – a popular question is “is it time for that first credit card?”
Some parents may want their kids to have it for emergencies, some to establish a good credit history for the future. However having that piece of plastic in your hand can be a very dangerous game of debt for young adults.
UW-Madison business professor Justin Sydnor says it’s all about the balance. “Debt is actually not a bad four letter word,” said Sydnor.
College credit cards used to get a bad rap, with young adults getting t-shirts or even free pizza for signing up. “You might for instance entice students in with promos and special awards,” Sydnor said. “But then you offer them very expensive interest rate credit cards, maybe even things with high annual fees.”
That’s been changing. In 2009, President Obama signed credit card reform that banned those practices. Plus, Sydnor says the cards themselves have been getting better. “I would look for things specifically targeted for students,” he said.
In college, expenses can just be unavoidable. “College is a reasonable time to acquire debt for good purposes,” said Sydnor.
But there may be a less expensive way to have that debt. “Credit card interest rates are still much higher than student loan interest rates,” Sydnor said. “The vast majority of students would be better off having higher student loans than having any credit card debt.”
Tip from Sydnor: it can actually be a good idea to pay off credit card debt with money from student loans. That interest rate on the student loans is lower, so you’ll actually have paid less once you’ve cleared your debt.
Sydnor said it really can depend on the person – it can be as individual as knowing if your student can handle it. And make a plan for when and why to use that credit card, so they don’t get in over their head in debt.