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College students are often the target of heavy marketing campaigns by major credit card companies. Some financial planners advocate resisting these offers at all costs. I have a different viewpoint.
I believe in teaching my children to be self-disciplined when it comes to financial matters (and that includes the use of credit cards), rather than merely scaring them into avoiding any money paths that may contain pitfalls.
While I recognize that cash purchases certainly have budget benefits, building a strong credit rating has its upside as well. Don't be fooled into thinking that being totally debt-free and having no credit rating will be as beneficial as having a sterling credit score. Good credit ratings are proof of a solid repayment record, something most lenders want to see. Popular zero percent automobile loan offers are only available to those with the best of credit. Insurance premiums (even just getting insurance) can be affected by credit scores. Mortgage interest rates are often influenced by borrowers' credit ratings. And, let's face it: most first-time homebuyers are not in a position to pay cash, even if it's a modest starter home.
Disciplined Spending Habits
There is certainly no denying that credit cards have the potential for abuse, but if young adults are taught the value of money early on credit cards can be a positive tool in their budgetary arsenal. My college-aged daughters both have credit cards, and they both realize that what is charged today must be paid, if not tomorrow, then within the next three weeks. Why? Because that's the limit of most credit card company grace periods. In order to avoid finance charges, the cards must be paid off each month. So, why have the card at all?
Well, here's one example of where credit card availability saved my daughter literally hundreds of dollars. My younger daughter has an excess of $2,000 of earned scholarship money available after her tuition and room and board has been paid. The excess funds, however, will not be disbursed to her until September 6. In the meantime, she needs textbooks. While the school will allow her to charge her textbooks to her account through the campus bookstore, bookstore texts cost nearly three times what she can purchase or rent the books for online. Using her credit card, she can purchase the books she needs now at the discounted price, earn a 1% cash back bonus on her credit card, and pay the bill off next month when her financial aid is refunded.
Benefits of Credit Cards
Let me revisit a point made in the previous paragraph: cash back bonus. Many credit cards now offer incentives to card holders. My daughter receives 2% back on every purchase at any grocery store or gas station, 1% back on everything else. Another daughter holds a card which offers limited time cash back bonuses of up to 5%. In addition, the card's website offers a link to certain retailers offering bonus cash back on purchases placed on the card. When she purchased her iPad, she received $45 in cash back bonus money. She then purchased a $50 Chipotle gift card with the $45, increasing the value of her bonus money even further.
The final benefit of allowing college students to have credit cards is using it as a learning tool for future financial contracts. Credit card acceptance requires understanding the fine print of credit card agreements. Young people need to know what costs are incurred with certain credit card uses, especially the horrors of using them for cash advances, and how to choose the best credit card for their own personal financial needs.
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