Financial Literacy for Parents and Students
When your children leave home for college, they will face a host of new experiences and responsibilities. As a parent, you recognize that now they will be "on their own" to tackle life's basic functions - at the same time that they are adjusting to a new environment and new freedoms. To help your student in this transition, he/she should know the "financial facts of life" before opening that first checking account or making that first purchase on credit.
That's why College Parents of America and MasterCard International are pleased to provide this guide for parents when they begin to talk about financial matters such as budgeting, paying bills and managing accounts. Money Talks examines basic money management skills that will serve your student well past the college years and help establish a sound financial future.
Best wishes for a successful college experience for you and your family.
College Parents of America
Catherine J. Cummings
Vice President, Consumer Affairs
Helping Your High School And College-Age Children Master The Financial Facts Of Life
It's never too early to help prepare your children to manage their finances responsibly. Certainly by the time your children are in college, they'll have to be ready to enter the world of independent financial management.
For your student, college is a world of exciting freedom and opportunity. But most parents know it's also a world where novices can easily get into trouble. And if that trouble shows up on a student's credit record, it may take a long time to go away.
To make sure your children know how to start their financial future on the right foot, you need to make sure they understand the fundamentals of personal finance. Don t assume they're learning this information elsewhere. Graduating high school seniors averaged a failing grade of 52% in basic personal finance knowledge according to a recent study.1
As a parent, you're the most important source of financial education for your children. By setting an example through your own behaviors, you've been teaching your kids financial lessons throughout their lives. It's important to clarify and reinforce those lessons with a focused conversation before your children enter college.
It's not always easy to talk with your kids about money. But by preparing yourself, you can help make the conversation a good one.
You can bet your children will be interested. Young people view managing money as a symbol of maturity and independence. Discussing personal finance with them shows that you see them as responsible young adults.
To help ensure a successful conversation, keep these tips in mind.
- Approach the discussion with a positive attitude.
- Set a tone of confidence, openness and trust.
- Laughter always helps. Lighten the mood with a joke.
- Make it an equal exchange, not a lecture.
- Ask plenty of questions, and listen carefully to the answers.
- Don't talk down.
- Don't bring up old financial disagreements you may have had with your children. Think of college as an opportunity to start with a clean slate.
- Make sure your kids know they can always turn to you for financial advice, information or help.
To get the process started, you might try involving your children in some of your family's typical financial matters, such as:
- Planning vacation budgets or major purchase payment plans;
- Budgeting for groceries and other necessities;
- Paying your family's monthly bills;
- Balancing the checkbook against your monthly statement;
- Comparison shopping for lower prices; and
- Reviewing your credit card statement together.
Start with the Basics: Budgeting
An excellent way to teach your children the fundamental principles of finance is to jointly establish a budget for college. The simple act of preparing a budget will make your kids think more carefully before they spend and will give them a greater sense of control.
The worksheet provided with Money Talks will help your children look at the big picture before they get any big surprises in the form of credit card bills, bounced checks or automated teller machines that refuse to surrender cash.
College students' budgets shouldn't be complicated. Simply follow these steps.
- Work together to itemize your student's regular monthly expenses.
- List total income, which may include money previously set aside, scholarships, loans, allowance or perhaps wages from a part-time job during school.
- Subtract expenses from income to see if the budget is reasonable.
- If the expenses outweigh the income, work together to trim expenses until the numbers agree.
- If at all possible, your children's college budget should include a savings strategy; and encourage your kids to make regular deposits into a savings account for future expenditures (such as a car, an apartment or student loans).
You may want to sit down together periodically to review the budget you've developed. Be sure your kids understand the importance of maintaining this budget to avoid overspending and debt trouble. But also remind them that it isn't carved in stone. If their favorite band is coming to town and they want to splurge on a concert ticket, they can simply cut back on other expenses for a month.
The Fundamentals of Using Plastic
Once you've established a budget, make sure your children understand some of the typical tools for managing cash flow. Beyond bank accounts, today's college students have access to a variety of payment options that when used responsibly can serve as tools to help them track spending. These include ATM cards, debit cards, smart cards and credit cards. Take a moment to explain the differences among them.
ATM Card - Most banks now provide an ATM (Automated Teller Machine) card with a checking or savings account, which allows your children to withdraw money anytime and get an instant printed record of the transaction. Stress the importance of keeping track of all withdrawals, as well as any transaction fees, to avoid overdrawing the account. Access to this account is restricted by a Personal Identification Number (PIN) provided to the account holder. To protect the account, tell your children not to share the PIN or carry the number with the ATM card.
Debit Card - Issued by banks and credit unions, debit/prepaid cards operate similarly to credit cards and are accepted at places that display the debit card logo. The money is withdrawn directly from your child's checking or pre-paid debit account, so usually there are no interest charges, although some financial institutions may charge fees for debit card use. Just like a standard ATM card, a debit card also allows cardholders to withdraw cash from their checking accounts. Debit cards are safer to carry than a lot of cash and are more convenient than checks. Advise your children to enter debit card transactions in their checkbooks and track their account balances closely to prevent overdrafts. All account transactions - including the amount, date and merchant location of each transaction - will be listed on a monthly statement to help track spending.
Smart Card - These new forms of plastic store cash right on the card. They are typically used for small purchases, such as bus fares, laundry machines and parking meters. Since your children can spend only the amount of cash they've loaded onto a card, smart cards may help them stick to a budget. After the card's value is depleted, it can be replenished. However, no identification, signature or payment authorization is required, so losing the card is just like losing cash. Some smart cards can be "locked" with a PIN that prevents anyone else from using the cash value on the card. Many universities today are issuing smart cards to their students. These cards have combined such features as student IDs, ATM, meal and activities cards.
Credit Cards - Your children should understand that unlike a debit card, using a credit card means that the card issuer has loaned them the money to make a purchase. The issuer will in turn send monthly statements listing the charges that have been made during the billing cycle. Warn students to carefully track how much is being charged to avoid overspending. Used properly, credit cards offer convenience, cash protection, world-wide acceptance by merchants for purchases and a hedge against emergencies.
When you and your children discuss the option of a credit card, talk about a general philosophy for responsible use. You might want to make sure your children understand the following principles:
- A credit card isn't free money;
- Charge only what you can afford to pay back;
- A credit card shouldn't be a money substitute for items they can't afford;
- Charges should be paid back in a timely fashion;
- When bills aren't paid in full, the outstanding balance collects interest charges;
- It's important to pay bills in full, but if not, at least pay more than the minimum payment due each month;
- Just paying the minimum payment due means that they are not reducing the amount owed because of interest charges added; and
- It is important that students notify card issuers when they move so that account statements are delivered promptly to the correct address to avoid additional fees and interest payments.
There's a good chance that your college-bound children will acquire a credit card while at college. Indeed, more than half of all college students have a credit card in their own name. For most students, one or two credit cards that are widely accepted should be plenty. In selecting a credit card, advise your children to look for key features, such as:
- Low interest rates or finance charges (also known as APR or "annual percentage rate");
- Low or no annual fee, if possible;
- A grace period before finance charges are incurred; and
- Other benefits, such as free gas or extended warranties on purchases.
Liability Protections for Card Carriers
If your credit or debit card has been lost or stolen or you suspect unauthorized purchases have been made to your account, you should contact the card issuer immediately.
If the lost or stolen card is a MasterCard credit card or debit card, you are protected in the event of unauthorized use of the card. This protection is known as "Zero Liability," meaning that the cardholder is not responsible for those unauthorized purchases. Zero Liability is in effect for consumer cards* when:
- The account is in good standing;
- The cardholder has exercised reasonable care in safeguarding the card; and
- The cardholder has not reported two or more incidents of unauthorized use in the past 12 months.
If you have a card other than a MasterCard, contact the issuer to determine its liability policy.
It should be noted that if a smart card is lost or stolen, it is the same as losing cash.
*Zero Liability does not apply to commercial cards or PIN-based transactions not processed by MasterCard.
College Students and Credit
Contrary to popular belief, the majority of college students pay off their monthly balances right away.2 In fact, when used wisely and responsibly, credit cards offer many benefits to college students. For your children, a credit card can:
- Establish a credit history;
- Provide security in emergencies;
- Eliminate the need to always carry cash; and
- Increase personal responsibility and independence.
How well your children learn to manage their personal finances will help determine what card features will benefit them most. For example, if the credit card will be used regularly for purchases (such as books, supplies and monthly expenses), then selecting a card with a lower interest rate will be more appropriate, especially if the card balance may be carried over occasionally from month-to-month. The interest rate becomes less important if the card will be used primarily for emergencies or only periodically and the balance will be paid-in-full. For the latter situation, a card with no annual fee may be the best choice.
Fees can be an important issue for the novice credit user because late payment, over-the-limit and cash-advance fees can add up if students are not carefully monitoring their spending and payment habits.
Shop around. Competition among the issuers of credit cards has created a buyer's market and card features can vary significantly from one issuer to the next. While a student who has no credit history may not yet qualify for the very best deals on the market, many issuers have established programs especially for college students.
Advise your children to always seek help or advice when necessary. If there is ever trouble making credit card payments or questions about charges on their bill, students should contact the issuer of the card and explain the problem. Credit information is also available to students on-line at www.creditalk.com. Budget and credit advice is also found from a local Consumer Credit Counseling Service or online from Myvesta.org (formerly Debt Counselors of America).
Five Signs of Overspending
Work with students so that they can identify the signs of overspending. They should be able to recognize a problem if these patterns develop:
- Always paying your bills late;
- Only making the minimum payment on your credit card;
- Exceeding the credit limit on your accounts;
- Working overtime to keep up with your credit card bills; and
- Using one credit card to pay off another.
Credit History 101
Your children should grasp the concept that their credit record, just like their school grade transcript, can have a lasting impact on their lives. While the grades in a transcript reflect academic performance, the credit payments, debt and income recorded in a credit history show a level of financial responsibility.
Explain that credit bureaus keep track of credit histories and then sell reports to employers, lenders, insurance firms and other companies your kids may need to rely on in the future. Like a financial resume, your children's credit history will be taken into consideration when they want to get a loan, buy a car, rent an apartment, get a job or buy a house. A strong credit history is vital to a good financial future.
With student loans and credit cards, college students can start a good credit history by establishing their ability to manage and repay debt. To help maintain a good credit history, remind them to:
- Live within their budget;
- Pay all bills on time; and
- Keep accurate records of all their finances.
Good Financial Habits Last a Lifetime
Remember that the financial lessons your children learn from you before they go to college are at least as important as the education they'll receive while there. By properly educating them about the importance of financial responsibility, you'll help protect them not only while they're in school, but for years to come.
College Budgeting Worksheet
|EXPENSES||Amount Budgeted for the Month||Amount Spent Week 1||Amount Spent Week 2||Amount Spent Week 3||Amount Spent Week 4||Amount Spent for the Month|
|Credit Card Payments|
Work Study $___+ Full-Time/Part-Time/Summer Job $____+ Money from Home $____+ Other $____= $____
This brochure developed in partnership by:
College Parents of America (CPA) is the only national membership association dedicated to helping parents prepare for and put their children through college easily, economically and safely. College Parents of America serves as a resource, advisor and advocate for its membership which includes parents of current and future college students throughout the United States. College Parents of America provides new information on savings strategies, financial aid, education tax credits and deductions and other ways to help pay for college; offers valuable advice during the application and selection process; advises parents on the individual opportunities and challenges they will encounter during their students' college years; and serves as the advocate for parents and higher education on Capitol Hill, in state capitals and on the nation's campuses. In addition, College Parents of America offers families special values on products and services.
For more information or a membership application, visit http://www.collegeparents.org on the Internet, call toll-free 1-888-761-6702, locally at 703-797-7104, or write to College Parents of America, 2000 N. 14th Street, Suite 800, Arlington, VA 22201-2540.
MasterCard International MasterCard International has the most comprehensive portfolio of payment brands in the world. More than 1 billion MasterCard® , Cirrus® and Maestro® logos are present on credit, charge and debit cards in circulation today. An association comprised of 22,000 member financial institutions, MasterCard serves consumers and businesses, both large and small, in 210 countries and territories. MasterCard is the leader in quality and innovation, offering a wide range of payment solutions in the virtual and traditional worlds. With more than 18 million acceptance locations, no card is accepted in more places and by more merchants than the MasterCard Card. In 1999, gross dollar volume exceeded US$727 billion. MasterCard can be reached through its World Wide Web site at http://www.mastercard.com.
College Parents of America and MasterCard International are both members of the JumpStart Coalition for Personal Financial Literacy and the National Partners for Financial Empowerment.
1. Jump$tart Coalition for Personal Financial Literacy, 2000 Survey of High School Seniors.
2. 1998, The Institute for Higher Education Policy, Credit Card Survey