September 08, 2016
Now that another college year has begun, I want to make sure that all the Moms and Dads have packed off the kids with one very important item:
A credit card.
Yep, you heard me right. And I do mean a credit card, not a debit card.
I love debit cards. Prepaid or linked to a bank account, debit cards are a great way for anyone to live within their means. Your adult children should definitely have a debit card.
But they should also have a credit card right now, for two related reasons:
• Having a strong credit score once they graduate will make their lives so much easier and affordable.
• Debit cards do nothing to help build a credit score. Credit cards do.
I wish it were different, but responsibly paying your bills and living within your means by using a debit card currently isn’t a factor in determining your credit score. And you better believe that today’s college students will be in better shape if they have a strong credit score once they graduate.
• A strong credit score can make it easier to qualify for a better car loan deal
• A strong credit score can help land a rental; many landlords check credit scores.
• A strong credit score can help open cell phone and utility accounts without having to make a deposit.
• If your adult child doesn’t yet have a credit card, I would encourage you to reconsider. Of course, you need to step up to the plate and make sure they understand how to use the card responsibly.
Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.