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From Editor: This is a guest post from Alban Smith
You are not the only one worried about how to maintain control over the health of your teen’s credit as in February 2010 President Barak Obama the Credit Card Accountability, Responsibility and Disclosure Act which makes it harder for credit card companies to prey on teenagers and suck them into using a credit card they can’t afford or control.
However, while the new laws state that a teen must have a job or a co-signer, it is still not impossible for your teen to get and use a credit card, so should you be the one helping them as co-signer, or should you take the law into your own hands and just say no?
Remember Being a Teenager? According to the American Bankruptcy Institute, 19% of all people who filed for bankruptcy in a year were college students – that means that one in five people who are filing for bankruptcy have yet to even start their career, or probably even move out of home. Before you can help your teen control their credit, you need to remember what it was like being a teenager. There are friends and dates to impress, clothes to buy and parties to go to, and the last thing you wanted as a teenager was your parents’ advice. Therefore, you need to help your teen stay in control of their credit, without actually controlling them. At the same time, you wouldn’t hand them a bottle of spirits to teach them how to drink responsibly, so instead, use the following tips to responsibly and effectively help your teenager manage their credit.
How to Help Your Teenager Control Their Credit
Teaching abstinence rather than contraception doesn’t decrease teen pregnancies and nor will forbidding your teenager from having a credit card stop them from having financial troubles in the future. Ignorance in matters which are a part of life that your teenagers are going to come up against sooner or later is not giving them a valuable start in the world. This is why helping your teen get a credit card and helping them learn how to use it responsibly is less likely to lead them into financial trouble than if they first run across credit in their 20s when they have their first job and they think they have enough money to do anything and don’t need to know the intricacies of their credit contract.
Therefore, use the following steps to help make sure your teenagers credit card use doesn’t get out of control:
Limit the number of credit cards. This may be a ‘do as I say, not as I do’ moment for you and your teen as you probably have three or four different credit cards in your wallet. However, to help your teenager learn about credit responsibly, and maintain control, make sure they apply for just one credit card in the beginning.
Choose a debit card. If you want to ease your teen into credit card use, start them on a debit card which looks and acts like a credit card, but which accesses the money they have in their account, without running up a balance each month. This means they don’t have to worry about making credit card payments each month or how much interest they’re charged, but they can use their card to shop online and choose ‘credit’ and sign when they pay in stores.
Additional card on your account. You could also add your teenager to your own credit card account, and get them their own card, with their own limit. This allows you to keep a very close watch on their spending. Some credit card providers will even allow you to take out a credit card for your teen from your account but with a different account number so if they lose their card you don’t have to cancel your account too.
Make sure your teenager has a job. Even if this is just a part time job, your teen needs to understand that they can’t spend the bank’s money without having some reliable plan to pay it back. This is also legislated in the new Act.
Budget and planning. You know yourself how tempting it is to keep spending when you have all of that credit available on your card, but you need to help your teen change their perceptions about what they can really spend. This means helping them work out a budget, so they know how much they can afford to repay each month, and therefore know how much they can responsibly spend on their card each month. This will help ensure they don’t carry over a revolving balance, and can avoid high interest charges.
Understand the terms and conditions. This is an opportunity to explain to your child about how credit card interest is applied, where your payments go when you make them, and the dangerously expensive consequences of compounding interest. You’ll also be able to check for any hidden fees or charges in the credit contract.
Regularly review credit card use. Make a time every three months or so to meet with your teenager to look at their credit card spending. Collect their statements and look at whether they are regularly paying off their balance in full, and how they are managing the rest of their finances, for example their savings plan. This is especially important around peak spending times such as Christmas.
Choose a low interest credit card. Look for the credit card offer with the lowest interest rate as this will mean minimal additional charges to your teen’s account if they don’t manage to pay off their balance in full each month.
About Author: Alban reviews term deposit rates at Savings Account Finder. When he is not working, he loves sharing his thoughts on personal finance.