5 Important Credit Card Lessons for Teens and Young Adults

Here are the credit card lessons everyone should know before they swipe their first piece of plastic; 

1.) Understand how credit cards work

At first glance, it looks like you’re getting access to free money. However, that’s not how credit works. Your kids need to understand that a credit card represents a loan. You’re not using your money — you’re using the credit card issuer’s money. You have a limit that you can borrow up too, set by the card issuer.

Teens and young adults need to understand that interest is an extra charge for borrowing money. You can borrow a portion of your available balance, and then repay it. If you don’t pay off your credit card balance when the bill is due, you’ll be charged interest. The bigger the balance you carry, the more you’ll pay in interest.

Consider using a credit card calculator to show your child how much interest could accrue from regularly carrying a balance. Show them that running up a big balance and being charged interest can keep them from meeting other financial goals that might matter to them. When they understand that credit cards are loans, and not paying them off can cost them even more, they’re more likely to rein in their spending and make better choices.

2.) Know the difference between a credit card and a debit card

Make sure your student understands that:

• Debit cards provide access to your money. They connect directly to your bank account and the money you already have. In many cases, if you don’t have the money, you won’t be able to use the debit card.
• Credit cards provide access to borrowed money. As long as there are available funds (meaning you’re beneath your credit limit), you’ll be able to spend on the card — even if there isn’t money in your own bank account. But, if you keep the balance into your next billing cycle, you can expect to pay interest on top of the money you borrowed.

Credit card information is reported to the credit bureaus and impacts your credit score, while debit card information may not affect your credit score. You can build your credit history with smart and responsible credit card use.

3.) How credit cards work with your credit score

One of the most important credit card lessons is that your card usage can impact your credit score. A credit score is a numerical way to summarize your ability to handle loans and other financial obligations.Without a good credit score, you might end up paying much higher interest rates on car loans and mortgages — if you can even get those loans at all. In some states, your credit score might affect your car insurance premium, and there are some landlords that run credit checks before they’ll let you into an apartment.

A credit card can be one of the fastest ways to build good credit. If not used responsibly, though, it can sabotage your credit score. Credit card issuers report your activity to the credit bureaus each month, letting them know how much you owe and whether you pay on time. The biggest ways your credit card habits affect your credit score are related to:

• Payment history: Your payment history accounts for 35% of your FICO® credit score. If you miss payments or pay late regularly, that can drag down your score. However, when you pay your credit card bill on time each month, that creates a record of responsible behavior that boosts your score.
• Credit utilization: How much of your available credit being used makes up about 30% of your FICO® score. If you’re taking up more than 50% of your credit limit and carrying a balance each month, that can result in a lower FICO® score. However, if you keep your credit utilization to below 30% (even better if you pay off your card), you can see a better credit score.

Basically, anything you do with your credit card is reported on your credit report, and the information from your report is used in the formula that figures your credit score. Practice good credit habits, and you’ll see a better credit score.

4.) Be careful with credit card and financial information

I always tell my kids to be very careful with direct mail offers, for example. If you’re going to discard them, tear them up before putting them in the trash. People can get a hold of them and try to set up a credit card in your name. If someone steals your identity and opens a loan or credit card using your information, that could have a big impact on your score — especially if they run up bills and then don’t pay. While you might eventually get the situation fixed, it can take a long time and can cause a big headache.

You’re better off being very careful with your information, choosing strong passwords and carefully shredding any mail offers you get for credit cards (after you’ve carefully considered the offer inside).

5.) Start slow and practice

Teach your kids credit card lessons by letting them make small purchases and practice paying them off. If your child is a teenager, you can consider adding them to your own card as an authorized user. This will allow them to practice using a card while you keep an eye on them. Plus, your teenager will start building credit based on card usage. Another option is to help your child open a secured credit card. They will have to provide cash as collateral, but a secured card, unlike a debit card, is reported to the credit bureaus and can help them build their credit.

Be sure that you monitor their usage at first. Encourage them to make small purchases and then pay them off quickly with money they earn from a job. It’s important to let your child know that it’s vital to only make purchases if they are in the budget and if they know they will have the money to pay off the card when the bill is due. As you start slow and allow them to practice making smart and responsible decisions, they’ll be more likely to do the right thing when they have their own card.

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