Teaching Your Kids About Credit Cards
When your mom or dad pulls a credit card out of their wallet to pay for items, it might seem simple and almost magical. No money ever changes hands, and just a swipe of the card pays for everything in their cart in just seconds. As convenient as credit cards are, people need to use them correctly. Because it's so easy to use a credit card, some people might overuse or abuse them, buying more than they can really afford. Owing this kind of money can be expensive and dangerous for someone's reputation. Understanding the facts about credit cards makes it possible to use them safely and responsibly.
What Is a Credit Limit?
A credit card company lets people use a certain amount of money to buy things with their card. This credit limit is the amount of money the credit card company is willing to let the customer borrow. The customer is free to charge any amount up to this limit with their credit card. Generally, people with a good credit reputation who have demonstrated that they know how to manage their finances will have higher credit limits than people who might have made mistakes managing their money or people who might have less experience using credit cards. As people show that they can handle their finances well, credit card companies will raise the credit limits on their accounts.
Although people are free to use a credit card up to the credit limit, this is not usually a smart idea. Any charges made with a credit card should be paid back before the end of the billing cycle, which is usually a month long. If a person does not pay off all of the money charged by the end of the billing cycle, a balance will be left on in the account. The credit card company will then charge the customer more money based on that leftover amount.
Credit card companies send monthly statements to customers. A statement lists all of the charges made during the billing period. The statement also lists the full balance due to avoid any finance charges and the minimum amount due to keep the lender happy. The statement will also have a due date for the payment. If the account holder does not make the payment by the due date, the credit card company will add a late fee on to the amount due.
Making regular payments on a credit card is important for keeping the account in good standing. Good management of a credit card account generally involves paying off the whole balance every month to avoid finance charges. When you pay your bill in full every month, this shows that you are spending money as you can afford to spend it. Keeping a balance on a credit card account suggests that the consumer may be spending more than what their budget would allow. Making minimum payments can keep the credit card account in good standing, but this is usually an expensive way to manage the account because of the extra charges the credit card company will add to the balance.
Interest rates are amounts of money that the credit card companies charge people for borrowing money. Interest rates are usually calculated as a percentage of the balance on the account. For example, if the interest rate is 10 percent and you leave a $200 balance on the account, the credit card company would add a $20 charge. This means the total amount due would now be $220 instead of just $200. But interest only adds up when you leave a balance on your account, so if you pay off the balance every month, you'll never have to pay any interest.
Advantages of a Credit Card
Using a credit card is good for a few reasons. Carrying cash around with you can be dangerous because you might lose it or a thief could steal it. If you lose a credit card, you would call the credit card company to report that it is lost. The credit card company will cancel the account, and you won't be responsible for any charges made with the card that you did not make. Also, using a credit card responsibly shows lenders that you manage your money well, and this makes lenders more likely to give you a loan if you need one to buy a house or a car. A credit card is also a way to pay for an unexpected expense that you might not have the money for right then.
Disadvantages of a Credit Card
Some people get into trouble because using a credit card is so easy. Using a credit card to buy things you can't afford can result in having to pay interest, which adds up and makes the amount you owe bigger and bigger if you don't pay it off. Misusing a credit card can also damage your financial reputation. Other lenders might not feel comfortable lending money to someone who has made mistakes with a credit card.
Over time, a credit card will become an important part of someone's credit history. Making regular charges with the credit card, paying the balance off in full each month, and making payments on time are all things that will help someone's credit score go up. Other lenders look at this credit score when deciding whether to let you borrow money or what interest rate they will charge you. A credit card can also lower a credit score and hurt someone's credit history if they don't use it properly. For these reasons, it is important to use a credit card only for convenience and not for purchases that you cannot afford.
- Advantages of Credit Cards
- Debit or Credit: You Decide (PDF)
- Three Lessons to Teach Your Children About Credit Cards
- Credit Card Lessons for Kids
- Sneaky and Fun Credit-Building Lessons for Kids
- Six Financial Lessons to Teach Your Elementary-Aged Kids
- Teaching Money Lessons to Kids
- How to Build Your Kid's Credit Score: Start in Elementary School
- Priceless Lessons: Six Strategies for Raising Money-Savvy Kids
- Hands-On Banking Instructor Guide (PDF)
- Financial Lessons Your Kids Can't Afford to Miss