How Smart Teens Use Credit Cards
When you added your teen as an authorized user on your credit card, it was with the intent to teach them financial responsibility. As you’ve likely noticed, teens (and some adults) often need to be reminded that today’s irresponsible credit card usage can damage their financial futures. A few, simple lessons can improve your teenager’s financial literacy, build their credit history, and save your credit score in the process.
Here’s what parents should do to encourage their teenagers to use credit cards responsibly.
Ensure They Understand That the Card is a Loan
It’s easy for your teen to forget that a credit card is a loan. A loan must be repaid with interest. Paying the credit card on time and keeping the balance low are two essential ways the card can build good credit. Help them understand the consequences of late payments that can hamper their desired financial lifestyle as they get older.
Encourage them to list the purchases and experiences they’d like to enjoy someday. These might include buying a home, traveling around the world, or simply buying a car. Explain how these goals become much more challenging with bad credit.
Set Boundaries for Usage
Assumptions are dangerous. Especially when it comes to credit cards. For example, your definition of a financial emergency is probably different than your teen’s definition. The last day of a clearance sale at a trendy clothing store is not what you had in mind when you told your teen only to use the card if emergencies. You were thinking more along the lines of paying for a tow if the vehicle broke down and your teen had insufficient cash on hand. Define the general circumstances in which your authorized user may use the card along with setting monetary spending limitations.
Help Them Understand Credit Card Limits
Review the credit card statement with your teenager each month. Highlight their charges against the card’s credit limit. Point out the consequences of exceeding the credit limit in terms of fees and other potential costs. You may impose additional consequences for exceeding the charging limits you’ve established for your teen, which will often be less than those available on the card itself.
Make Sure They Know How and When to Make Payments
While you still have the credit card statement out for review, explain how the minimum payment is calculated, when it’s due, and how paying only the minimum required payment can cost $1,000s. This information should appear on each monthly credit card statement making it easy to demonstrate. A brief explanation of how credit bureaus share this information with potential creditors will solidify the reasons on-time payments are essential.
Insist Private Information Remains Private
Sharing the credit card, PINs, or passwords with friends can result in trouble for both of you. Identity theft is only one of the potential problems of sharing private information. Even if a friend promises to pay your teenager back, let your teen know that they are not allowed to lend money to a friend regardless of the circumstances. In the case of a dire emergency that involves a friend, a parent should be included in the discussion. Offer to work through a solution together if such a situation arises.
Communicate with your teen regularly about their financial goals. Especially those that require good credit such as buying a car, renting an apartment, or securing a private student loan to pay for college. Focus on the steps needed to live the financial lifestyle of their dreams, so a discussion of finances seems less like another parental lecture.