Giving teens a well-rounded financial education includes helping them understand credit cards. From the pros and cons of credit card usage, to how they differ from debit cards, giving your teen an understanding of the potential risks and rewards of using credit cards can help them avoid costly mistakes in the future. Let’s take a look at these important credit card lessons for teens.
Credit Cards Aren’t Free Money
Perhaps the single most important lesson teens need to know about credit cards is that they aren’t free money. Explain that a credit card is a loan, and every time you use a credit card, you’re using someone else’s money. The cost of borrowing that money is paying interest. The longer you take to pay back the money, the more you pay for using it.
Explain the best way to use credit cards is to make a few small purchases and pay the balance in full, on time, every month. This strategy keeps the account active and shows creditors they can trust you to pay back what you borrow.
The Difference Between Credit and Debit Cards
Since they look virtually alike, teens may not have a good grasp of the differences between credit and debit cards. Explain that debit cards are attached to a bank account and the spending limit is determined by the account balance, whereas the spending limit on a credit card is based on the credit limit.
You’ll also want to make it clear to only use debit cards for cash withdrawals. Getting a cash advance from a credit card is costly and something to avoid, since they often involve additional fees and higher interest rates. In other words, when using debit cards, it’s your money, while credit cards are using someone else’s money.
How Credit Cards Affect Credit Scores
Start by explaining that a credit score is a numerical representation of a consumer’s use and management of credit. Then talk about how a high credit score opens doors and makes it possible to borrow money at reasonable rates, while a low score can make it difficult or impossible to obtain manageable rates on credit cards and loans.
Bring credit cards into the conversation by explaining that payment history and credit utilization are the two biggest contributing factors to a credit score. Making mistakes with credit cards early on can cause problems later. Frame the importance of building good credit in terms of teens’ future goals. These can include buying a new vehicle, getting a job, renting an apartment, and eventually, buying a home.
The Importance of Protecting Personal Information
Today’s teens are well-versed in keeping online information secure, but they are probably less familiar with some of the dangers of snail mail. They should know that any time they receive a pre-screened credit offer in the mail, they need to shred it before recycling it to avoid having someone open credit accounts in their name.
To eliminate receiving these offers (almost) completely, visit optoutprescreen.com
Practice Makes Perfect
There are several ways young adults can ease into using credit cards without the dangers of getting into unmanageable debt. One way is to have a parent or other responsible adult add them as authorized user on one of their credit cards. This gives the teen the ability to use the credit card under careful supervision; you can handle mistakes quickly before they spiral out of control.
Another good way to test the waters of credit cards is with a secured credit card. These cards are linked to a dedicated savings account, with a credit limit that matches the savings account balance. If the cardholder is unable to pay, the lender uses the savings balance to pay the billing amount.
Finally, retail store credit cards are another way to begin building credit. They are typically easier to acquire than other credit cards and usually start with a fairly low credit limit. Interest rates on these cards tend to be higher, so if you choose this route, it’s essential to pay off purchases every month to avoid paying those high rates.