A few years ago I sat with a teacher in conversation. He spent a good majority of the time talking about credit cards and trying to understand why his son was afraid to apply for one. His child wasn’t offering any explanation aside from, “I don’t want too.”
As a man of business, he was ready to help his child and set him up for financial success. In the end, both were missing out on great opportunities. One to be taught and the other to teach.
These 6 truths to teach teenagers about credit cards and credit scores are not inclusive. These truths lay the foundation of basic rules. As teenagers enter their young adult years they need all the financial knowledge to help set them up for success in an ever growing materialized world.
6 Truths to Teach Teens about Credit Cards
1. Purpose of a Credit Card
Ask your teenager this question, what do you feel is the purpose of a credit card? The reason for this question is to gather what they already know and build upon it.
This question will also open the door to discussion and explanation. The opportunity will be yours to explain that a credit card is not an all-access pass to unlimited spending. This tiny card changes people’s lives and is a tool.
Having and building credit is key to anyone’s financial success. Without credit (or a really poor credit score) the likelihood of qualifying for a loan with great interest rates is very small. A credit card can help teenagers and young adults build their credit score over time.
2. Types of Credit Cards
There are the three main credit cards, Visa, Master Card, and American Express. These three credit cards offer different interest rates, rewards programs, fees, and benefits to their membership. Many credit cards charge an annual fee. This fee can range from $30 to $100+ depending on the card’s benefits and terms of the agreement.
Choosing the right credit card can be nervewracking. I recommend studying the credit card’s annual fee, rewards program, and interest rates before deciding on one.
3. Interest Rates
Yes, credit cards charge interest rates on outstanding balances and understanding them is important. As you decide on a credit card, do your research on the interest rates. Find out if this is charged monthly or annually.
You will also want to know the percentage rate. The majority of credit cards to charge a monthly rate on all outstanding balances. This rate can range from 13-35+%!
The best way to avoid interest charges is to pay off your balance every month. This is key to setting up anyone’s financial success. Paying off your credit card every month in full allows your credit score to grow higher and shows potential future lenders your financial reliability.
4. Limit Borrowing Amount
I’m going, to be honest, teenagers don’t need a ton of spending credit. Before your teenager has a credit card associated with their name they need to have rules to follow.
One family rule can be this: do not charge what you cannot pay off. And what you do charge, pay off right away.
My friend wanted to help his son build his credit by charging gasoline purchases. He knew his son was filling up the vehicle and paying for the gas with his debit card. By making purchases you have funds for can build your credit score in significant ways.
Decide how much credit you want to give your teenager each month. This amount can be capped at $50, or even $100. Then increase the amount as desired according to their financial understanding. Remember, credit is not built by how much money you can charge to your credit card, but if you’re paying this amount off in full every month.
5. Building or Breaking Credit
Credit cards are a wonderful tool to use. As we have discussed in this article, the success of building financial credit depends on paying off the amount every month. The same can be said when the monthly amount is not paid off. When this occurs interest rates add to the outstanding balance and lowers your credit score.
6. Remaining Balance
Do everything you can to pay off your credit card in full every month. Interest rates on your remaining balance add up very quickly and ultimately lower your score. Keep this in mind as you understand this principle, charging large amounts and paying them off in a short time will not increase your credit score.
Think of your credit score as a marathon rather than a sprint. Your long term habits are what ultimately affects your credit score and future financial success.
As your teenager understands the purpose of a credit card, the many types available, interest rates, limit amount, making or breaking credit, and the effects of remaining balances, they will be prepared for financial success. These habits will carry with them as they enter their young adult years.
What are you currently teaching your children? Leave a comment and let us know!
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