By Debbie Shelton
SVP, West Wabash Avenue Branch
After my oldest son went away to college, I remember when credit card statements started showing up in our mailbox.
My husband and I quickly began to talk to our son about the risks of opening and keeping multiple credit accounts. Thankfully, he closed those accounts as quickly as he opened them.
It’s easy for older teens and young adults to believe that credit cards are a simple way to get what they want, without considering future consequences. And proactive teaching is the best way to arm our kids with the knowledge they need to use credit cards wisely.
The legal age to sign up for a credit card in the United States is 18. As you try to determine whether your child is responsible enough to have his or her own credit card, the answer can feel complicated. What are the pros and cons, what kind of credit card would be best, and how should you teach them how to use it?
The reasoning that many people believe in is that that building up a teenager’s credit score is beneficial. And often, when young people come in to INB, they say they want to start establishing their credit.
With established credit, young adults will have some credit history to their name in a few years when they might want to purchase their own car or buy or rent a home. So I suggest to them that they apply for a card with small limit, make minimal charges to it, and then pay it off in full each month.
Access to a credit card also gives teens a certain amount of responsibility. They gain experience from making good decisions (or, from dealing with a card that has been maxed out.) Also, making online purchases with a credit card is preferred as compared to a debit card tied to your account; credit cards offer more consumer protection consumer in cases of fraud.
Weigh Benefits and Pitfalls
There are benefits of handing your 18-year-old a credit card, but there are pitfalls too.
In a government-sponsored money management test given by the organization Jump$start Coalition for Financial Literacy, almost half of the high school students who took the test failed, and less than 10 percent were shown to understand basic credit card concepts like how to calculate interest rates and what an annual percentage rate (APR) is.
Parents can combat common pitfalls by educating and monitoring credit cards. Consistent education is especially important because even those with good intentions can fall down the black hole of seemingly limitless spending. Here’s what you need to talk to your teen about…
The purpose of access to credit. When it comes to teens, credit cards are a tool, used to build positive credit history and for emergencies – not to eliminate or ignore positive spending habits. For someone going away to college, I do suggest a single credit card for emergency purposes, and I encourage parents to be on the account, because it helps keep the student in check. Sometimes, before you know it, you’ve racked up $200 just going out to eat at college!
Interest rates. If you don’t pay off your card in full each month, it will cost you. Many credit cards have high, or even exorbitant, interest rates. I always recommend young people begin saving for something they want to buy, developing self-discipline and making sure they truly want that item, instead of using a credit card for immediate gratification.
Paying the balance, not the minimum. We all know the power of compound interest when it comes to saving, especially for long-term goals like retirement. But compound interest works against you if you don’t pay off your balance in full, growing your debt quickly.
Late fees. Not only will you get docked with a fee, but there are major consequences if you don’t pay your bills on time. Your credit score drops, and you may have a difficult time getting any future loans.
Cost of debt. One spending rampage can be detrimental in the long run, and parents may not know about it for weeks. One way to solve this potential problem is to impose a low credit limit on your child’s first card.
What to do if your card is lost or stolen. There is an emergency number on all credit cards to report a lost or stolen card, which should be done immediately. For INB credit card holders, call 800-558-3424.
I encourage parents to continue to monitor your child’s account, even after you feel he or she has “proved themselves” as a good decision-maker while using credit. It can take only a few impulse purchases for debt to mount quickly.
Conversations with your teens about all issues regarding credit cards should be constant so that access to credit doesn’t begin a downfall of personal finance but instead, provides an opportunity for learning responsible money management and self-discipline in purchasing.