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Understanding Credit Cards
17 May 2019

How to Get Your Kids to Begin Understanding Credit Cards

In the past, credit cards were only used for travel/dining and required cardholders to pay their bill in full each month.

Today, their usage is far more widespread. In fact, it’s not uncommon for people to make the majority of their purchases on a credit card and then pay the balance off rather than using their checking account or cash.

But, there is still plenty of information you need to know in order to be a responsible spender. This is especially true for kids who at an age where they can apply for one in the near future.

Not sure where to start? Don’t worry, we got you covered.

Let’s take a look at everything you need to know about understanding credit cards and what to teach your kids about them.

The Importance of Building Credit

Your credit score can be thought of as a grade for how financially responsible you are. Good credit behavior is crucial if you want to secure a low-interest loan in the future for large purchases (such as a car or a down payment on a home).

Habits that will boost your credit score include:

  • Making payments on time
  • Using your card consistently from month to month
  • Staying up-to-date with your current score
  • Disputing any inaccuracies

Over time, your child will watch his or her credit climb into the upper tiers of credit score ranking, putting them in great shape when buying a home, car, or having their credit checked by a potential landlord.

Don’t Buy Anything You Can’t Afford

Credit cards are notorious for giving people an empowering feeling that they can buy now and worry later. There’s a reason that the average household in the US owes nearly $7,000 in credit card debt!

But, there’s simple golden rule to follow that is sure to keep you out of trouble:

If you don’t have enough money in your bank account for whatever it is you want to buy, don’t buy it.

Let’s take a look at a quick example.

Matt needs a new laptop for school, but he is currently unemployed due to having a full course load this semester. He has $600 in his savings account but decides to purchase a laptop that costs $2,000.

A few days later, he realizes he’s maxed out his available credit and can only afford to make the minimum monthly payment. As time goes on, Matt is owing more and more on his original $2000 purchase.

In the scenario above, Matt would have been much better off purchasing a laptop that cost $300-$400 and paying off the cost before his next bill was due.

So, you should avoid situations like these at all costs!

Know The Difference Between Debit and Credit + Understand Interest

This is important information to remember when looking to become a fiscally responsible young adult.

Debit Cards

These are linked directly to your bank account. Since you can only spend money that you have when using a debit card, you don’t have to worry about getting yourself into debt.

You can, however, incur fees from your bank or credit union if you attempt to purchase something you don’t have the funds for.

Since the money belongs to you, there’s no risk for anyone else involved. Therefore, you won’t build a credit score or financial reputation with a debit card.

Credit Cards

With a credit card, you can use money lent to you by a credit card company to make a purchase. Many people use them to make large purchases that they can’t afford at the moment but can pay off with their next paycheck.

Since credit card companies are lending you money, they’re taking a risk that you won’t be able to pay it back. This is why they charge you interest on your purchases.

Understanding Interest

Interest is a fee that card companies charge borrowers for the time that the money remains borrowed.

Since lenders suffer when people don’t pay off their credit debts, this helps credit card companies profit. In turn, this allows them to have the funds to keep lending out to other cardholders.

This is where your credit score comes into play. The lower your score, the bigger risk credit card companies see you as. People with bad credit often encounter higher interest rates and have greater difficulty in getting approved for loans, with the short term loans like quick loans having the highest.

Even if you have a high credit score, it’s important to remember that…

The Longer You Take to Pay, The More You’re Paying

Interest accumulates over time, meaning that you’ll want to pay your balance off sooner rather than later.

This is especially true for larger purchases since interest is a percentage of what you owe. Credit card balances that are in the thousands can be financially crippling and their effects can last for years.

Fortunately, many card companies offer students credit cards that have 0% interest for a brief period (often 12 or 24 months) in exchange for a lower credit limit (often under $2,000).

This will allow kids to make purchases they normally wouldn’t be able to afford without incurring interest.

However, even though there isn’t a penalty for having a balance, they should still treat their credit purchases as they usually would. This means paying everything off month to month in order to build credit and keep your credit line available for future purchases.

Understanding Credit Cards Can Seem Difficult

But it doesn’t have to be.

With the above information about understanding credit cards in mind, you’ll be well on your way to making sure your kids spend their money as responsibly as possible.

Want to learn more finance tips that will make your life easier? Make sure to check out the rest of our blog!

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