A Teenager's Guide to Credit Cards
Although it's easy for adults to think of teenagers as children, the truth is that people in this age group are consumers. Teenagers often earn money, work to budget their income, and make frequent purchasing decisions. As an important group of consumers, you need to learn about budgeting, saving, and managing credit wisely. Credit card companies are watching teenagers, eager to offer enticements to encourage the use of credit. While it's important to use credit to build positive credit, this takes understanding and skill. At some point, you will likely be ready to get your first credit card. How you manage this responsibility could determine your credit future.
What Is Credit?
Credit is the process of one party loaning money to another party with an agreement that it will be repaid. Loaning money between two parties often involves adding interest to the original loan amount. Interest is extra money that the borrower agrees to pay for having the loan. Interest is usually a percentage of the loan amount. As people use credit responsibly, they develop a pattern of borrowing money and paying it back as promised. This gradually builds a positive reputation for a consumer, and lenders will generally trust this type of consumer to pay back money borrowed. Some people get into trouble, however. It's possible to borrow more money than you can afford to repay under the terms of an agreement. If this happens repeatedly, a consumer will develop a reputation for not adhering to an agreement. Lenders will likely begin to mistrust this type of consumer, and they will typically avoid lending them money.
People often use credit even when they don't have a credit card. Anytime you borrow money from a parent or friend, you are technically using credit. This agreement likely involves you promising to pay back the money by a specific time. As long as you follow through and repay the money as agreed, everyone is happy. But if something happens and you don't make the payment as promised, problems can develop. Perhaps you overextended yourself and borrowed more money than you can afford to pay back. If this happens, you might have to renegotiate the terms so you can make several payments until you can pay it back in full.
Important Details About Credit Cards
A credit card can have several important advantages for a consumer. Using a credit card to make regular purchases and paying a monthly balance off in full is an excellent way to establish a pattern of responsible credit use. Using a credit card to make some purchases is often a convenient and safe way to make a payment also. Anyone who is ready to have a credit card needs to understand how this type of account works. With a credit card, a bank offers the borrower a specific borrowing limit. The consumer can use the credit card for purchases up to this limit. However, this would not be a prudent use of the credit card unless you can afford to pay back this amount before the end of the billing period. Every month, the credit card company will issue a statement that details all of the charges made to the account. The best way to maintain the account would be to pay the balance in full to bring it back down to zero. This course of action accomplishes two things: it shows responsible spending, and it avoids expensive interest charges. The credit card company will add interest charges to the account for any balance not paid by the end of the billing cycle. This interest can add up quickly, and some people get in a lot of trouble with unpaid credit card balances.
- Teenagers and Credit Cards (PDF)
- Teens Are Consumers, Too! (PDF)
- Youth and Credit (PDF)
- Helping You Transition to Adulthood (PDF)
- Credit Card Facts
- Ready for Plastic? (PDF)
How Parents Can Help
Parents can help teenagers manage credit wisely. When a teenager younger than 18 wants a credit card, a parent needs to provide permission. After age 18, however, teenagers can proceed with credit cards apart from their parents. Parents should set a responsible example for how to manage credit and spending. Parents should also talk about the entire process of earning, budgeting, spending, and managing credit so teens can learn about the process. Stressing responsible use of a credit card, keeping spending within a budget, and paying off the balance each month are crucial so teenagers learn about managing a credit card.
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- Make Sure That Your Child's First Credit Card Experience Isn't a Disaster (PDF)
- Credit Card Usage of College Students (PDF)
Building a Solid Credit History
Building credit takes time, and it happens gradually as a teenager begins to use credit and show responsible spending. Many young people begin building credit with a secured credit card. With this type of account, you deposit a specific amount of money, and this becomes your credit limit. For example, if you deposit $1,000 into an account, your spending could go up to this amount. As you use the credit card, you must use it responsibly. Paying off the balance each month is an important demonstration of responsible usage. Over time, lenders will see this responsible spending and repayment pattern, and you will gradually begin to build a positive credit history. Another way to build a good credit history is to get a loan with a cosigner who already has good credit. The cosigner will have ultimate responsibility for the loan if something happens and you don't repay it. However, you must pay back the loan under the terms of the agreement. Successfully repaying the loan will demonstrate your responsible use of credit. As long as you focus on using credit responsibly and you don't allow any late payments on accounts, your credit score will gradually rise to a solid number.