If you’re like most parents, you’ve taken the time to instill healthy financial practices in your youngsters. That informal education does not always extend to the use of credit cards — but it should. Right on the heels of proms and college applications, teenagers will soon find themselves thrust into a plastic-saturated world — and having some basic knowledge about smart credit card habits can make a tremendous difference. Smart teen credit card habits will put your kids one step ahead of their peers, allowing for a smooth transition into adulthood and a nice jump start on building a healthy credit history.
Give them a Starter Card
Teens who understand responsible credit card usage in high school will be less likely to fall into the common college debt spiral. One option to teach smart teen credit card habits is with a prepaid debit card, which can be funded directly from the student’s savings. Or you could add your teen as an authorized user to your own account. If you consider your teen responsible enough to hold a credit card, make sure he or she is also capable of maintaining a bank account from which to make the payments. Show them how to set a monthly limit and keep a record of their purchases. Point out when the running tab is nearing too close to the monthly limit of what they can afford to repay. Be sure to set guidelines on what your teen can and cannot buy with the card — and review the statement each month as it arrives.
Teach Them That Credit Isn’t Free Money
It doesn’t take long for the average consumer to understand that overuse of credit leads to debt. However, teens might be less likely to appreciate this risk. One idea is to ask your teen to hand over the amount of cash (plus a few dollars extra) that he or she spent, or plans to spend, on a credit card. Once your teen sees that amount disappear from a checking account or allowance, he or she might reconsider the purchase. This also helps them to understand that any credit card spending must, eventually, be repaid — and often ends up costing more in the long run, thanks to interest and other fees.
Use the Monthly Statement as a Learning Tool
Just as teens are starting to appreciate the convenience and glamour of credit card usage, it’s time to peel back the curtain and point out some of the stark realities. Dig up one of your latest credit card statements and show them the total amount of your purchases, as well as the amount of interest charged and your APR rate. Most statements will also provide a rundown of how long it will take you to pay the balance — and how much you’ll pay in interest — if you only make the minimum payment every month. That is another good teen credit card habit to learn — how paying your balance in full every month, or making more than the minimum payment, can save thousands of dollars in interest fees.
Resist the Urge to Bail Them Out
If your teenager spends excessively and ends up accruing a mountain of debt, don’t panic — or try to solve the problem alone. Together with your teen, come up with a plan for him or her to repay the outstanding amount — whether through an after-school job or a monthly payment plan. It may seem cruel at first, but in the long run, it can be a momentous lesson for your child. In the real world, parents don’t just sweep in and erase debt problems — and the sooner your child can understand the realities of managing financial responsibly, the better.
Talk About the Importance of Credit Scores
Credit scores will be extremely important in your teenager’s future — and now is an excellent time to explain how their impact penetrates far beyond qualifying for loans and credit card offers. In a few short years, they could be applying for a job or trying to rent an apartment. Explain that employers, landlords, and creditors all use credit checks to verify an applicant’s financial status and level of responsibility. If teens grow into adults who understand the importance of smart credit card habits, they will have no problem achieving a solid credit score.
Set a Good Example
It’s no easy feat to teach kids about smart teen credit card habits. While you’re spending this time educating your child, make sure you take this opportunity to check in with your own credit report. Give us a call today at Ovation Credit and we’ll be happy to offer our wisdom with a free consultation.