Whether or not your teen is planning to get a credit card next year, the truth is that your teen is likely to be swimming in credit card offers on and around campus. A credit card can help young adults build a positive credit rating, which will reflect well on them when it comes time to rent an apartment or buy a car or house — but only if it’s used wisely. As a parent, here are seven things to teach your teen to make this foray into adult life a positive step toward building credit rather than a disastrous descent into debt.
It’s all about the APR
Yes, rewards are enticing, but encourage your child to ignore the glitz and points and choose the card with the lowest APR (the interest rate and fixed fees that your teen will be charged on every purchase). This is usually not the card sponsored by your child’s college, since “affinity cards” often give a percentage of your purchase to a particular cause. Nor is it typically the highly marketed card that gets your child a free t-shirt or Frisbee on his walk to class. Also, tell your child to beware the intro APR — the low rate they’ll get upon opening that’ll only last for the first six to 12 months or so — and to be sure they find out the card’s true interest rate.
A big point to drive home to your teen is that a card that carries a 13.4 percent interest rate — if they don’t pay their balance in full right away — ups the real cost of a $100 pair of jeans to up to $113.40 after just one month of interest. And it only goes up from there.
Adhere to a budget, not a limit
Have your child create a monthly budget of expected expenses, including a certain amount for cafes, concert tickets, and other fun stuff. Teens should base the budget on income from work (or allowance) — not on the card’s credit limit.
“The problem with cards is that they can feel like Monopoly money, and result in kids spending more than they would if they had to part with cold, hard cash,” says personal finance expert Beth Kobliner in her book Make Your Child a Money Genius (Even If You’re Not).
Teach your child to limit purchases to small items — basically the same things he or she would buy with their allowance — and plan to pay the entire balance every month. If students want to make a larger purchase — like a computer — treat it as a big deal. Figure out how long it will take to pay off the purchase, which will include paying interest on it, and compare the price plus interest to the purchase price. Is it worth waiting (and saving) so she can buy it with cash? Figure out how much money she can save on interest by paying it off sooner rather than later.
Check the balance at least weekly
Encourage your teen to download the app for the card he chooses. Teens should learn to visit the website of their credit card company at least once a week. Not only can they stay on top of their spending, they can spot any fraudulent charges.
Pay it off. Every month. And understand and avoid fees.
This piece of advice may be one of the greatest gifts you ever give your child: Teach your teen to pay off his balance is full every month — no exceptions. Carrying a balance means paying interest and making every purchase more expensive. Talk to your teen about the pros and cons of setting up an automatic payment plan with the bank. These plans make paying the minimum or the full balance automatic, but people run into trouble (and hefty bank overdraft fees) if their bank balance will not cover this automatic payment on the day it’s withdrawn. That said, when your teen forgets to pay on time, credit card late fees can run up your child’s balance by $25 to $39 each time. What’s more, late payments are reported to the three big credit agencies, so it’s a double whammy of penalties: fees now and poor credit later.
Don’t use more than 20 percent of the card’s available credit
Even many adults don’t know that charging more than 20 percent of the available balance on a card hurts your credit score. So if that shiny new card gives your teen a credit limit of $500, your teen should try to keep the monthly charges below $100. And maxing out your card, even if you pay it off monthly? Fuggetaboutit. Credit card companies are a step ahead of you, and they may report your monthly balance to the credit bureaus before you pay the bill. If the credit bureau finds your card is maxed out, your score will plummet.
Pay on time
Students may find it hard to care now, but they’ll find that their credit history follows them after they leave college. It’s important that teens know this up front, so they can establish good credit during the college years that makes it easier to rent an apartment and qualify for loans after graduation. Explain that if your teen decides to live off-campus later, a rental agency will check his credit score before allowing him to sign a lease — or they will require that the parents co-sign the lease.
Don’t co-sign a credit or debit card with your child
Tempting as it is to help out your child, don’t do it. “Never give your kid a debit card linked to your checking account, since that would mean unfettered access to your money,” Kobliner advises.
As for co-signed credit cards, which are designed for kids unable to get one on their own, your good credit will tank if your child messes up. By co-signing, you’re taking on additional debt, such that it may have a slightly negative effect on your debt-to-income ratio (DTI). Kobliner’s advice: “Just don’t do it: Nope, no, Nah, nyet.” If you want your child to have a card for emergencies, consider adding your teen as an authorized user on your American Express card. The money is from your account, but the company allows you to put a limit on how much your teen can charge.