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College is the first time most young adults manage their own finances. It's also a time when many students rack up large amounts of credit card debt. Help them avoid this fate educating them about credit choices before they leave your home. You should also teach them how to make a budget, track spending, and create a spending limit. Bradford Stroh visits NBC11 to offer additional tips in this video.
NBC: Going to college is an exciting experience for students, but for some also a time when they can rack up credit card debt. Bradford Stroh is with Freedom Financial Network, he is live in our San Francisco studio with tips on how to teach your college bound kids to be financially responsible. Good morning and thanks for joining us.
Brad: Thanks Laura.
NBC: What would you say are the main reasons why college students get into so much debt, because there are so many credit card offers out there?
Brad: Well, it’s a combination of a couple of factors. When students go to college it's usually the first time they are making their own personal financial decisions which is I think a big burden on a young student. It’s also a time when credit card companies love to make very enticing offers on pre-approved offers for college students. And then combine that with Students generally have high expenses and very low income which can combine to create a pretty volatile combination if it is not managed properly.
NBC: Do you want them to stay away from the credit cards altogether or is it they can get some but manage them properly?
Brad: Well the goal really would be to manage appropriately and the way to do that is a couple of things. If we really advise people, since it really is the first time that you are making your own personal financial decisions to be educated about your options. Know APR's, know FICO scores, know credit profile also make sure that you plan appropriately which is also budget. Come up with basic expense budget Come up with conditional expense budget and make sure that you are planning and managing expenses within those budgets.
NBC: Alright you touched on some right there. I want to talk about some tips for students to stay financially sound, away from home. Sticking to a spending limit is one suggestion. Do you think parents should set up this budget for the, or that students should have a part in it as well?
Brad: Well, to be honest since it is such an important decision for students, the ideal situation is students make their own financial decisions so they are setting the groundwork for future financial discipline. The parents should be involved to the extent that you really want to avert any disaster which is large credit card balances or things that are going to impact students for the rest of their lives when they're 25 or 30 and want to buy a home that's when the parents should really get involved.
NBC: Do you recommend that parents should give their children allowances every month?
Brad: Allowances are one way to do it another is to come up with a pre set spending plan and there’s ways to do that which is give a debit card which has a fixed amount that they can spend each month or come up with a cash amount that you give to your student weekly. When the student goes over that cash amount their conditional expenses are cut off for the rest of that period.
NBC: And track your spending, know where that money is going.
Brad: Yeah, that's very important and financial discipline is a key component of it which is you learn the fundamentals early on in life and its going to benefit you the rest of your life. So the goal there is really be financially disciplined and know your income level coming in and know your expenses coming out and be absolutely certain that you are managing to your budgets every month so you don't run into large credit card balances.
NBC: And you suggest that people set their own credit line as well?
Brad: Yeah that is a good idea and we recommend to students to only carry around a credit card with a very low limit $500 dollars or less. The goal there is avoid any impulse purchases. They're going to be hard to pay off down the road. The goal is to always pay off your credit card in full each month. Don't carry around balances it's a horrible use off your income paying interest and fees to the credit card company. A good way to do that is keep a very low limit on your credit card and make sure you pay it off every month.
NBC: Exactly, don't get in over your head because interest rates can really they can eat you up all the interest payments that you'll be making.
Brad: Well that's right it’s actually a fact that we give out to college students is, if you run up $1,500 of credit card debt with an APR of 20% that can take you 17 years to pay it off by only paying minimum payments every month. Make sure the decisions you are making now in college are not things you are going to regret later on in your life.
NBC: How can parents let go of, I guess some of this responsibility that the kids now have to pick up?
Brad: Well it’s a good question and it’s a challenge for parents it really is the first time that the student is going to be financially independent and the goal is to allow them that rope so they can make their own mistakes but also give them a net. The best thing there is, educate the student make sure they understand the consequences of their decisions and then stay involved to make sure that you monitor what their activity is on the credit cards. Make absolutely certain that they don't run up balances that they can’t afford to pay off because college is a time when there are a lot of expenses and a lot of financial decisions you have to make as a student, it’s very important that they don't get out of control.
NBC: Alright Bradford Stroh, thanks so much for joining us this morning.
Brad: Thank you, Laura.
NBC: Good advice, boy it really can come back to haunt you for years to come after that.