A Credit or Debit Card for Your College Student?

As your child heads off to college, you may be wondering whether it's better for her to have a credit card or a debit card to pay the bills. Both types of cards have their advantages and disadvantages.

Plastic on Campus

The surge in credit card usage has filtered down to college campuses, where plastic has become firmly entrenched. According to student-loan agency Nellie Mae, 76 percent of undergraduate students in 2004 had at least one credit card. Meanwhile, Kiplinger.com reports that the average student graduates with about $3,000 in credit card debt.

Credit Cards

The big advantage of credit cards is that they allow the student to build a credit history. Once college is over, entering the real world without a credit profile can make life extremely difficult. The potential downside, of course, is that if used irresponsibly, a student may accumulate large amounts of credit card debt. In addition, failure to make payments in a timely manner will damage the student's fledgling credit profile.

Debit Cards

Alternatively, debit cards may help control a student's spending. A student opens a debit card account by depositing money with a bank or credit union, and funds are deducted whenever a purchase is made with the card. If the available balance in the account is not enough to cover the purchase, the transaction can't be completed. In addition, there are no interest or late-payment charges with a debit card, though other fees may apply. The main disadvantage of debit cards is that they do not establish credit.

Another option is a prepaid credit card. However, these are not really credit cards, as no credit is extended—they function more like debit cards.

Beware of the Ease of Obtaining Credit

Evaluate the pros and cons of credit and debit cards, and choose one, or both, according to your child's needs and her ability to manage personal finances. However, be aware that credit cards are very easy for college students to obtain, even without parental approval. Credit card issuers see college campuses as lucrative environments to find new customers: thousands of students who constantly need to spend money on books, supplies, and food, yet who are always short of cash. Credit cards are very easy for college students to obtain, even without parental approval.

Talk with your child about the responsible use of credit, and if you decide that a credit card is appropriate, encourage her to start slowly—get one credit card with a low credit limit. One or two low-limit credit cards will be more than enough to establish a credit history. Also, shop around for the best deal on interest rates. The first offer you receive may not be the best deal.

Decide Who Will Pay and for What

Should you opt to get your child a credit card, decide whether you or your child will be responsible for making the monthly payments, and make sure she understands this. If you will cover some credit card expenditures and the student will cover others, make sure she is aware of who will pay for what. In addition, explain to your child which expenditures are acceptable for this credit card and which are not. For example, if you'll allow your child to use the credit card for tuition and books but not for ordering pizza, make sure this is clear.

One of You Has to Pay

You should not get a credit card for your child if you do not intend to make the monthly payments and your child has no means to make the payments, either. Remember, by using a credit card, your child is taking out a loan that must be repaid. Make sure that either you or your child will have the ability to do so.

Credit Cards and Tuition

Some students pay tuition with their credit cards, which is fine if they have the funds to pay off that balance by the time their grace period ends, so as to avoid finance charges. However, leaving that balance on the card can be very costly. Credit card rates are generally much higher than student-loan rates, so if a student is not planning to pay off the balance right away, taking out a student loan is probably a better idea.

The Best Choice for Your College Student

Your child's situation and financial maturity will determine whether she should use a credit or debit card. But since credit cards are so easy for a college student to acquire, talk to your child about the importance of managing a budget and using credit responsibly. Both are skills that will last a lifetime.