Your clients’ kids and their credit

Given all the media coverage of college students drowning in credit card debt, it seems that today's young people would be more aware of the dangers of unwise spending.

Given all the media coverage of college students drowning in credit card debt, it seems that today’s young people would be more aware of the dangers of unwise spending. Year after year, however, studies show that college students seem to be living in some sort suspended reality or state of denial about their financial circumstances.

For that reason, I suggest that savvy financial advisers get into the game of helping their clients’ young-adult children.

I believe that advisers would endear themselves to clients by finding ways to arm the youngsters with information and knowledge to counter the barrage of credit card marketing aimed at kids.

It’s no wonder that college students are easy prey for credit card companies. The plastic merchants set up tables on campuses and entice students to sign up for cards with the promise of T-shirts, cameras, books, music vouchers and other goodies.

On average, a college freshman is offered eight credit cards in his or her first semester. Eight terms later, the average graduating senior has an astonishing six credit cards in his or her name. That translates into about 25% of college students’ leaving school with more than $5,000 in credit card debt, according to a recent national poll. What’s more, about 10% of those polled admitted that they owed more than $10,000 on their credit cards upon graduation.

Since paying off student loans is tough enough without the added burden of credit card debt, I’m sure moms and dads would be thrilled if their trusted adviser could help arm little Johnnie or Mary with some money management skills before disaster struck.

That’s not going to be easy.

Most undergraduates are financial novices who find themselves in a new and exciting independent phase in their lives. According to financial professionals, many students get caught in a vicious cycle of maxing out credit cards — often with expenses that are unrelated to education — and then transferring those balances to student loans. The following semester, since they feel they have wiped the credit card slate clean, they start using their plastic all over again.

Students have no idea that their credit card history will trail them and affect their lives to a degree probably greater than their grade point average.

Therein lays the irony of credit cards: Without one, students find it difficult to make the leap from college to the real world, because they have no credit history, can’t rent a car or even rent an apartment. Without credit, it’s hard to do much of anything. But abusing a credit card blackens credit history and also limits a young person’s choices.

A middle ground does exist, according to advisers with whom I spoke informally. They suggest allowing the student to sign up for one (that’s just one) credit card so that parents can closely monitor how it’s used and ensure that it’s not abused.

Additionally, these advisers said they urge the parents always to be available to discuss managing credit.

A credit card used correctly, of course, is a vital financial tool for college students. For many college students, getting a credit card is a rite of passage. However, it is also can be their excuse to spend excessively and without permission. And sadly, it is also a way to get into a lot of financial trouble, which can take years to fix.

“We teach kids how to make money, but we don’t teach them what to do once they make it,” said one adviser.

Financial professionals say the answer to student debt is not avoiding credit altogether. The key is to establish and build a sound credit history that can help to open doors in the future.

Since credit card debt haunts many college students — and their parents — and can lead to all sorts of problems, the smart adviser should be proactive and find ways to help. Do that, and your clients will love you for it.