There’s a good chance your college bound teenager will obtain a credit card while attending college. Close to two-thirds of college students have at least one credit card in their name. In addition to the drugs and alcohol talk, parents need to have a “credit card conversation” with their teens before they leave home.
Here are some important tips on how to teach your teens about credit cards:
- The basics: Charges in one month should be paid in the next month to avoid paying interest; an interest charge occurs if the balance is not paid in full before the grace period expires; interest compounds if a debt piles up; credit card companies charge late fees; match receipts with all transactions by using the credit card statement; check if the credit card company made any changes in the terms by reviewing the monthly statement.
- Usage: Before they get a credit card set boundaries on what it can be used for.
- Account holder: Put the card in the parent’s name.
- Limits: Select a card with a low limit and monitor your teen’s credit card usage. If the credit card company raises the limit it needs to be lowered to its original level. Also, consider a prepaid credit card.
- The details: Teach teenagers to read the fine print. What is the interest rate after the introductory rate expires? What type of balance computation method does the credit card company use? Does the credit card have an annual fee? Does it have a grace period? When will the fees be charged and how much are they?
- Credit history: A good credit history is important. A bad credit history can prevent teens from renting an apartment or buying a home.
- Gimmicks: Teenagers should be aware of enticing give-aways and gimmicks.
- Minimum payment: Making the minimum payment may not reduce the amount owed because interest charges will accrue.
- Payments: Teenagers should pay for all or for a significant portion of the balance with their own money. They probably won’t appreciate the value of money until they spend money they have earned themselves.
- Money substitute: Credit cards shouldn’t be used as a money substitute to pay for items they can’t afford.
- Multiple cards: Teens should avoid using one credit card to pay for another.
- Notify card issuers: Teenagers should notify the card issuer when they move in order for the account statements to be promptly delivered to the correct residence.
- Cancel cards: Cancel unused and unnecessary credit cards. Just cutting them up is not sufficient. The cards will show up as open lines of credit until they’re canceled. Request the creditor to reflect “account closed by consumer” on the credit report.
- Late payments: If teenagers know the payment is going to be late they should let the credit card company know ahead of time. The company may go along with an alternate payment arrangement that won’t put a mark on their credit report.
- Multiple lines of credit: Too many open credit lines will likely be regarded as a negative on the credit report. Lenders are not happy if people have the ability to quickly incur a substantial amount of debt.
- Billing errors: Put billing errors in writing since a telephone call won’t protect their rights. Write to the creditor at the address shown on the statement for billing inquiries.
- Negotiate rates: Sometimes an interest rate can be negotiated with credit card companies.
- Offers to skip payments: Credit card companies typically offer the option of skipping a payment during the holidays. The offer should be rejected since the loan continues to accrue interest.
- Friends: Teenagers shouldn’t let friends use their credit card. If a friend can’t make the payment, then your teen is responsible for it.
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Teenagers should deposit a set amount of money in their savings account on a regular basis. By having access to a supply of money they won’t have to use their credit card when big expenses occur.
Credit cards can create huge financial debts and ruin credit ratings. Teens need to learn how to effectively manage a credit card before they get one.
Brian Jenkins, a member of the BrainTrack.com writing staff, writes about a variety of topics pertaining to college students.