Aside from a teenager with car keys, the next most frightening experience for parents is a teenager with a credit card. The number of teenagers who use credit cards is increasing dramatically and credit card companies are actively pursuing young people through mail applications and on college campuses.
Three things your kids need to know about credit cards:
1.Credit cards have a higher interest rate than any other type of borrowing method. Therefore, credit cards have a higher cost.
2.If a person makes only the minimum payment on a credit card balance each month then their debt will keep increasing even if they don’t use it for any other purchases.
3.If a payment is missed then the person’s credit rating will suffer which will make it harder to get a loan or apartment lease in the future.
The following are some tips on how to teach kids to use credit cards wisely:
Before giving a credit card to a kid, make sure they’ve had practice with cash spending. Make sure they pay certain expenses such as clothing or entertainment with their job earnings or allowance. Insist that they contribute to a saving account on a regular basis. Make sure they know how to budget, stay on budget and save money.
Start out by getting them a debit card. This will give them experience with a plastic card and will protect them from debt. The money will come instantly from their savings or checking account and will teach them the importance of limiting spending.
Look into a secured credit card. A bank will give you a credit card that has a limit equal to the amount of money in a kid’s savings account. If the teen can’t pay the monthly amount then the money will come out of their savings. This will help teens to handle credit and build a credit history without getting in debt. If you can’t get a secured credit card then consider a card with a low ceiling.
Look into a joint card. Apply for a credit card along with your teenager. This will allow you to monitor the teen’s use of the card every month when a statement arrives. You can also control the card when spending gets out of control. However, you should remember that with your name on the account you are legally responsible for paying for the credit card.
Give the teens consequences. Discuss with them what will happen if their credit card experience goes bad.
Make sure you discuss the following eight things with your teen:
1.They only need one card.
2.Look for a card with no annual fee, low interest rate and a high grace period.
3.Pay the balance in full every month to avoid interest charges. The only exception is a real emergency. Discuss what counts as an emergency.
4.Teach them to subtract credit card purchases from their checking account immediately.
5.Emphasize the importance of paying at least the minimum amount if you can’t pay the balance in full.
6.Mail the payment a week before the due date to avoid late fees.
7.Do not use a cash advance unless a serious emergency.
8.Teach them the importance of a credit history.