What's the one thing you wish you had known before opening your first credit card? It’s likely you're thinking you wish you better understood the way credit works before applying.
Introducing your teen to responsible credit habits now will only benefit them as they reach adulthood. In general, most teens understand that a credit card isn’t free money, but do they understand the true cost of debt? Do they know how and when interest is charged? Can they grasp the concept that a poor credit score will impact future financial wellness and purchases like a new car, or a house?
If you answered yes to any or all of those questions, congratulations! Your teen just might be ready for the responsibility of a credit card. If you're not so sure, start the discussion about responsible credit today.
Credit = Trustworthiness
Credit abuse occurs because we want something right now. We don’t think about the consequences of our present actions on our future selves. Talk to your teen about the larger concept of credit (save the wants v. needs convo for another day). Explain that credit acts as an indicator about their level of trustworthiness. Before making expensive & exciting purchases like cars and houses, they will need to be able to show they are responsible with credit. If they do not have the amount of money needed for these expensive purchases, they will need a loan. Lenders, such as USALLIANCE Financial, will look at credit score to determine their level of trustworthiness.
Talk through a couple of scenarios. Discuss their career goals and aspirations. Many businesses run a credit check before hiring a potential employee. Poor credit could be viewed as an indicator of poor job performance or unreliability and could prevent them from being hired. They may be excited about moving out of the house & into their own apartment. Are they aware that landlords will run a credit check before accepting a rental agreement? If they're learning to drive, they may be dreaming of a nice new car. They'll need an Auto Loan for that purchase. A good credit score can lead to lower interest rates on a loan and lower payments in general. A poor credit score could lead to higher interest rates and payments, or even a flat out denial of the loan.
Find a scenario that resonates best with your teen to help them understand the importance of good credit habits.
Credit Score Affects Financial Wellness (and Your Credit Score)
For teens who are just getting started with credit, it’s a good idea to go over how credit score is calculated. Payment history, length of credit history, new credit, and amount owed are all factors. If you need a refresher before talking to your teen, brush up by reading the Top Factors That Impact Your Credit Score.
Create a Plan
Create some guidelines to help your teen navigate their credit card usage. Will it be an emergency only card? What qualifies as an emergency? Who will pay the bill at the end of each period? Who will keep track of that due date? Make sure that your teen understands how interest works and how it impacts the amount owed over time.
Start with Prepaid
If your teen currently has no experience with using plastic, it’s a good idea to begin with a prepaid debit card. These cards are preloaded with a certain amount. Your teen will only be able to spend up to the amount on the card. If they continue to hit their limit every month, it's time for a budgeting talk.
Open a Secured Card
Once you feel confident in their understanding of responsible credit, think about adding them to your USALLIANCE Secured Visa Card. Keep in mind that your actions will now impact their credit and their actions will impact yours. Watch their use of the card to ensure that they’re not spending above their means. If they are unable to pay off their part of the bill each month, sit down and review the account on a regular basis. Discuss where they’re overspending and where they can cut back.