“If I only knew then what I know now.”
This statement is especially true when it comes to credit. Do you remember getting your first credit card? Did it feel like a license to spend money you didn’t have? Then before you know it, the rude awakening arrives in the mail: the credit card bill, with interest and penalties. Here’s how to ensure your teens don’t fall into the same trap.
Welcome to Credit 101
Learning about how credit works can be confusing for a young person because it is a bit contradictory. As soon as your teen is making money at a part-time job, they should apply for a credit card, to build up a healthy credit rating and set themselves up for a strong financial future. However, they should not be living on money they do not have. The best way to build good credit is to apply for a secured card. There is no risk of default to the lender on this card because it already has money on it. But your teen will be learning to make regular payments and building a good credit rating for doing so. You can also make your teen an authorized user on your credit card.
Work on a 30-day plan
Teach your teen to set limits on their spending. You can work with them to set up a monthly budget for regular bills like their cell phone, as well as occasional spending like school lunches, entertainment, and incidentals. You should also be teaching your teen to put some money away from every pay check, and to pay off any credit cards within 30 days, to avoid paying interest or penalties.
Teach the risks to a good credit rating
While your teen is enjoying the freedom of a credit card, they also need to learn the risks. Advise them not to apply for multiple cards, and teach them what a “hard inquiry” is and how it negatively impacts their credit rating. Share some of your own credit history with them and explain how you can consolidate your credit cards and the associated benefits thereof.
Remind them if they are unable to pay off the full amount each month they should attempt to keep their running debt load at less than 30% of their allowable borrowing limit.
Finally, teach your teen to spread their spending out over the year. If a prospective employer runs a credit check on your son or daughter and he or she has just bought a car, paid a tuition installment and bought a pile of textbooks, their credit rating is going to have a poor showing.
It’s important for your teen to have a credit card, but it is also a huge responsibility. Credit allows us to obtain things we can’t afford right away on our own, but we need to have a plan to pay it back, either in regular installments or in full, at the end of each month.
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