For parents who want to help their teenagers learn about personal finance, budgeting, and spending, introducing credit cards can be one helpful step. But while a credit card may be a useful financial tool, it’s easy to run into trouble if you don’t use it responsibly. Although most credit cards require applicants to be at least 18 years old, it’s never too early to start discussing responsible credit card use with teens. Here are five things parents should know to help their young adults use credit cards wisely.
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1. Don’t Share Your Card or Your PIN
A credit card should not be lent to or shared with friends. This also goes for any personal identification numbers (PINs) or passwords associated with the card.
If a teen has been added as an authorized user on a parent’s card and their card falls into the wrong hands, then mom or dad could fall victim to fraud or identity theft. 1
2. Know Your Limit, Grace Period and How to Make Payments
Teach your teen to keep purchases well below their card’s credit limit. Be sure they understand that they can avoid additional interest charges by paying the full outstanding balance during the grace period — the time between the last billing cycle and the minimum payment due date.
You can set up email reminders to know when payments are due or to let teens know when purchases exceed a set amount. You also may choose to create an automatic payment from a bank account to avoid missed payments altogether.
3. How Credit Cards Affect Credit History
How a teen manages their credit today could impact their options to borrow money in the future. Missed or late payments and consistently going over a credit limit are negative credit activities that stay on a credit report for at least seven years. This could affect your teen’s chances of getting a car loan, a student loan or a mortgage when they’re older. 2
4. Understanding the Purpose of the Card
Discuss the purpose of your teen’s credit card before they start using it. Is the card to be used for emergencies only? For everyday purchases like gas or lunches? Or is it for college living expenses or textbooks? Clarifying the card’s purpose and consequences for misuse may help teenagers limit irresponsible purchases and also discourage them from developing impulsive purchase behaviors.
5. What to Know About Interest and Fees
Your teen should understand the credit card’s associated fees and interest charges. Getting cash from an ATM with a credit card means interest charges plus a cash advance fee. Going over the credit limit or making a late payment also may result in fees and/or a higher interest rate.
Also talk to your teen about minimum payments. If you make only the required minimum payment, your account incurs interest on the remaining balance, which will add to the debt. For example, if you make only the minimum payment on a $2,000 balance with a card with an 18.5% interest rate, it will take 11 years to pay it off. 2
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Credit cards can be a good introduction to the adult world of money management, so long as teens get the information they need to use them wisely.