There is a method to what some readers consider my madness.
Some people hate that I hate debt.
Others disagree when I encourage families not to borrow for college.
And, man, do I get a lot of email when I recommend that college students, especially freshmen, not have credit cards.
I value this feedback, so I created the Color of Money “Talk Back” feature, in which folks provide counterarguments to something I’ve written.
“I disagree with the idea that credit cards aren’t important for college students,” wrote Sallie of Freeport, Maine. “Perhaps if they are going to college near home, that is true. But even for them, I think [credit cards] are good. They provide a safety net.”
Let’s stop right here.
We should not be teaching young adults that credit is a safety net. Cash is their saving grace. Of course, at some point, having good credit will matter — but not in their formative financial years.
Sallie provided an example of when a credit card could be needed.
“What if something happens to their parents?” she asked. “How do they [the students] get home?”
OK, there’s a possibility that both parents could become incapacitated. But how about teaching our adult children to be more resourceful than immediately turning to credit in a crisis? If such a situation occurred, they may have to call upon help from other relatives who have the ability to pay for a train or plane ticket. And, hopefully, the parents have done some estate planning so that there is an individual who is authorized to access funds that could be used to bring a child home.
“A grandchild of mine had her computer destroyed in the middle of final papers,” she argued. “How to get a new one quickly?”
My daughter is a junior in college and she is as tethered to her computer as she is to her smartphone. So I get that a broke computer is a big deal. But colleges have computer labs. Libraries have computers. On a college campus, plenty of other students have computers. Again, let’s be wary of scaring young adults into thinking credit is their only choice when things happen.
Sallie also advocated a credit-building strategy that I wholeheartedly discourage.
“I gave my children, and now give my grandchildren, a credit card on my American Express (account),” she wrote.
Hold on here! Do you fully understand what it means to add someone on your credit card as an authorized user?
This person can benefit from your good credit habits, such as low credit balances and on-time payments. But the reverse is also true. If the primary cardholder doesn’t pay the bill on time, that bad history could be reported as well. And an account holder who bumps up against the maximum credit limit could also work against everyone else using the card. Additionally, the strategy of boosting another’s credit may not work. Not all credit lenders report the account history to an added user’s credit file. However, my biggest issue with adding someone to your card is the fact that they have no obligation to pay the bill.
Sallie said her grandchildren understand that the card “is for emergencies and use it as such, with periodic other uses for which they have been good about paying me back. Their parents pay me back the other [times],” as was the case with the broken computer. “Another good thing about this is that I, of course, in getting the bill, get to see what they have used it for.”
So a card that was supposed to be only used for emergencies is in fact used for other purchases. That slope is getting slippery.
Here’s something else to consider. A recent report of 42,000 first-year college students and how they behave financially found that among the many things they had to deal with in college, they felt the least prepared to manage their money.
And how did they become more confident?
It wasn’t by using credit.
“Feeling prepared to manage money in college was not related to a student’s experience with credit cards — it actually decreased as they got cards earlier in life,” according to the “Money Matters on Campus” report by EverFi, an education technology company, and Higher One, which partners with colleges and universities to lower administrative costs.
It was experience with managing a bank account that was key in developing independent financial skills, the report said.
Students should master using cash — even a debit card — long before graduating to MasterCard or Visa. Yes, it may take years to build up exceptional credit. But it only takes a short time of mismanagement to damage it.
