Q: My daughter just graduated from high school and is heading for college in the fall. Over the past few months, she has been deluged with offers for "free" credit cards. She wants to get two or three to feel secure. I'm scared she will abuse this credit and then ask my husband and me to bail her out -- which I would be reluctant to do.
A: The message to get across to your daughter is that her credit history is a precious asset -- a "report card" that will grade her financial responsibility for future lenders. Negative entries will hurt her chances to buy a car or get a mortgage. Most importantly, credit histories are almost always scrutinized by landlords as well as employers.
Credit card issuers report both positive and negative experiences, on-time payments, late payments and, worst of all, non-payments. These entries will remain on the credit history for seven years.
Next, explain the costs -- hidden and otherwise -- associated with credit cards. Some "free" cards aren't free at all, especially if an annual fee is imposed after months or a year. Make sure the cards offer at least a 25-day grace period, and explain to your daughter that the grace period applies to when the check is received -- not the date it is sent.
Examine the interest rate charged on unpaid balances. Is it fixed or variable? Tell your daughter that in most cases if there is any unpaid balance left at the end of the grace period, interest will be charged on the entire previous balance as well as any new purchases.
If you are indeed reluctant to bail her out if she abuses the credit card, tell her that upfront. However, since the repercussions of non-payment are so serious and so many, I would suggest that if such an occasion arises, you lend her the money. This loan should be a formal document.
Responsible use of a credit card (notice I did not say two or three) can be a big plus. It can establish a positive credit history, provide convenience, teach good financial habits and offer flexibility in an emergency.
Susan Bondy founded her namesake financial services company in 1980 to provide financial planning and asset management. She is a frequent guest on "Good Morning America," the "Today Show" and National Public Radio. She is the author of "How to Make Money Using Other People's Money." Write to Ms. Bondy in care of The Sun, 501 N. Calvert St., Baltimore, Md. 21278. All letters will be treated confidentially.