It’s great if you’re fortunate enough to have parents who can help cover the cost of college. But when they pay the freight, it doesn’t help you build your credit score. Here’s how to have your cake and eat it too.
The main concept is to have your parents provide you with a monthly stipend from which you pay all your own college bills. They deposit the money automatically every month into your online checking account. This way, you still get the support you need but you also establish a good credit rating.
In my case, I asked my college-age daughter to figure out all her costs; tuition, books, rent, food, (a little) recreation and everything. Obviously, some of her expenses (like rent and food) are monthly expenses. Other costs come in at different times, like tuition and books. I asked her to figure her total annual college costs and she eventually came up with $24,000.
I audited her estimates and happily discovered that she wasn’t padding the books so I set up a monthly deposit into her account for $2,000 a month. So far, so good. She’s paying her own bills and building her credit score too.
Before we came to this arrangement, I explained to her that if she blows all her money at the start of the month she’ll be broke. I won’t bail her out. If that means she doesn’t have the money to pay tuition, she won’t attend school that semester and I wont give her any support at all. That also means that she has to be in savings mode during the summer. If she spends her stash in Maui in July, she’ll be working in September rather than attending class.
So far it’s worked great. And we get free monthly credit reports and watch her credit score rise (slowly) as she builds her history.
How you can get your parents to agree to this set up…
1. Do Your Homework.
Figure out what it costs you to go to school. Figure in everything and write it down. In our case, my daughter forgot a few items and we had to adjust upwards from $1800 a month at first to the real number of $2000. That’s OK. You don’t have to do this perfectly. This idea of budgeting might be new to you. Just do the best you can.
2. Sell It.
Your parents are like anyone else. Sure they love you and want to help. But they’re also interested in what they get out of the deal. First, they save time and hassle. They can set up an automatic monthly deposit into your account and stop worrying about paying the bills as they come in.
Next, they’ll be teaching you financial responsibility. This is a biggie and worth a lot to your parents. Tell them you understand that it will be your responsibility to manage the payments and control your spending. Further explain that you realize the consequences of not doing a good job and that you are committed to a good outcome. Offer them full access to your bank accounts and credit card so they can monitor how your money is being spent.
It’s easier to embark on a new adventure if the stakes aren’t so high. Ask them to try this for 3 months and then reevaluate. Don’t ask them for a full year commitment. The risks are too great for them and you.
If you follow these steps you’ll be gaining a great deal as will your parents. You’ll learn the all-important skill of personal financial management and build a great credit history and they’ll get a kid who won’t end up being a financial illiterate.
Do you think your parents would go for this? Why or why not?