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By Maggie Tomasek
Cash is no longer king in today’s digital world, which means more people of all ages are relying on plastic and digital payment methods. According to Sallie Mae, 56 percent of undergraduate college students had a credit card in 2016, though students are still more likely to use debit cards or cash than credit cards.
Getting your teen their first credit card is a big step, and one that can have a significant impact – both good and bad -- on their financial future. Set them up for success by following these tips to teach your teen how to use credit cards responsibly.
When you use your plastic card to pay for things, explain to your child how and why you’re using it. This is also a good opportunity to teach them the difference between a debit card and a credit card. The earlier you can start having these conversations, the better. Your kids are always watching and learning, so being a good role model for how to use credit cards responsibly will go a very long way.
Learning responsible overall money management is crucial before a teen can even consider getting their own credit card. Open a teen checking account or savings account that comes with a debit card, and use it as an opportunity to teach teens about fees, budgeting and other important financial basics.
Once teens have a good financial foundation, you can get into more detail with them about how to use credit cards. The main rule of thumb: don’t charge what you can’t pay for. Unlike debit cards, money is not deducted straight from your checking account, you’re taking out a loan with each purchase. You need to pay back that loan, and the longer you take to pay it back, the more it will cost you – both in dollars and in your credit score. Make sure they understand interest rates, late fees, credit card spending limits and how to set up automatic payments.
One of the most important lessons when it comes to teaching teens how to use credit cards is that the way they use their credit card now will impact their financial future for years to come. You can explain how their credit score is calculated, and that as a credit card newbie, paying their bills on time is the most important thing they can do. Not only will they avoid late fees, but it’s also crucial to building their credit, keeping a good credit score and becoming a financially responsible adult.
When you think your child is ready to have a credit card, consider your options. You can add your teen as an authorized user to your credit card, which means your child can use the card but you’ll still be responsible for making payments. Keep in mind that activity on the card will appear on both of your credit reports. Many financial institutions also offer student credit cards, or if your teen has a steady job, they might qualify for a standard credit card with a low credit limit. Start by looking at your current financial institution’s credit card offerings and go from there.
I got my first credit card at 18, the summer before I left for college, and it came with a $500 limit. My mom made it clear that while the credit card was mainly for emergencies, I needed to use it in order to start building credit. She told me to use the credit card once a month to buy gas or a pizza – a small purchase that I would ordinarily pay for with my debit card – and to pay off the credit card balance in full each month. One easy way to do this is to set up a recurring bill, like your child’s Netflix subscription or cell phone bill, to be charged to their credit card each month. It’s a small purchase they’ve already budgeted for, and it will allow them to get in the habit of paying their credit card bills on time and in full each month while also building their credit. (Fun fact: I still have the same credit card – albeit with a much larger credit limit – and I continue to reap rewards in the form of a long credit history.)
Maggie Tomasek is the Social Media & PR Specialist at Alliant. She began her career as a journalist for newspapers in Utica, N.Y., Des Moines and Cincinnati before moving to Chicago in 2009. Maggie is an eight-time Chicago Marathon finisher and a lifelong creative writer with a passion for comedy. Her mom instilled in her a great sense of fiscal responsibility, and her big sister told her to throw that responsibility out the window every once in a while in the name of life experience. So far, that combination of financial advice has worked out pretty well for her.