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How to Talk to Your Teen About Credit Cards

Getting a credit card is a quintessential rite of passage for your teen leaving the nest.

by Oscar Tirabassi | July 16, 2021
<p>Woman's hand fanning out credit cards</p>

Some credit cards offer special perks like sign-up bonuses, cashback, and airline miles.

The Squeeze 

  • Credit cards can seem confusing, especially to a young person inexperienced with personal finance. Keep your teen informed about responsible credit card use now, and they’ll thank you later. 
  •  The Credit Card Act of 2009 prohibits students under 21 from receiving credit cards unless they have income or a co-signer who helps the applicant build credit. Not all issuers allow co-signers.
  • To avoid paying a very high balance, advise your child to keep their credit card’s balance below 30 % of its available credit.

Ahhh, credit cards, that shiny piece of plastic that offers an easy and convenient way to buy. At first glance, a credit card might seem too convenient to a young person. After all, who wouldn’t want instant “free money” at their fingertips? 

With great power, however, comes great responsibility. That’s why it’s critical to talk about responsible credit card use to your teen. Here’s how to answer their burning questions about credit.

How does a credit card work?

If your teen already has experience with a debit card, it’s time to clarify how credit cards compare. The key difference, of course, is that with each swipe, you’re borrowing money rather than using your own money directly from your checking account. This is known as revolving credit; meaning can borrow money from a bank up to a credit limit. The limit will depend on a variety of factors, including your income and other debts. 

Some credit cards offer special perks like sign-up bonuses, cash back, and airline miles. They also provide better protection against fraud. That’s because the card issuer wants to get back the money it lent you and, therefore, will make more of an effort to resolve the fraud.

Payment networks such as Mastercard, Visa, and American Express handle credit card transactions, ensuring that the cardholder is billed and the correct merchant paid. 

How do you pay back credit?

When you get your monthly credit card bill, you’ll have three options: paying a minimum amount, paying the total balance, or paying some amount in between. Paying the minimum will cost you the most in the end as the bank charges interest on what you still owe. (Pro tip to share: Paying your bill in full each month will give you a grace period that lets you avoid paying any interest at all.) 

To avoid paying a very high balance, a good rule of thumb is to keep your credit card’s balance below 30 percent of its available credit.

It’s critical to talk about responsible credit card use to your teen. Here’s how to answer their burning questions about credit.

What is a credit score?

Your credit score is a three-digit number that tells lenders how risky it would be to give you a loan. The higher, the better: a score at the maximum of 850 is excellent and puts you at very low risk. However, any score over 740 is considered excellent. 

Contrary to what some believe, checking to see your credit score does not lower it. The main factors that affect your credit score are the length of time you’ve used credit and your ability to pay bills on time.

Your credit score influences the types of credit cards you’re eligible for. For the most part, people with excellent credit can get credit cards with rewards, while people with average credit scores can get cards that offer rewards for a fee. People with bad credit often only qualify for secured credit cards, which usually lack rewards and require a security deposit that you receive after closing the account or switching to a regular unsecured card.

What fees will I have to pay?

It depends mainly on the credit card you’re using, but virtually all credit card issuers charge some sort of interest.

If you don’t pay your credit card bill in full every month, you will start to accrue interest. Interest rates (also known as Annual Percentage Rates, or APRs) vary between purchases, balance transfers, and cash advances.

Some credit cards require annual fees, which can range from $20 to hundreds of dollars. Avoid credit cards that charge very large annual fees without perks and rewards in return. Make sure you’re getting your money’s worth.

Late-payment fees vary by card issuer. As of 2020, the most a card issuer can charge you under federal law for your first-time late fee is $29. Late fees also can never exceed the minimum payment due.

Balance transfer fees are generally 3 percent to 5 percent of the amount of debt transferred. Some card issuers will waive the fee if you perform the transfer within a specified time frame.

Some card issuers charge foreign transfer fees if you make a transaction with a non-American merchant. They are typically not charged by travel credit cards.

Can I get a student credit card?

Yes, but you’ll likely need a co-signer. The Credit Card Act of 2009 prohibits students under 21 from receiving credit cards unless they have income or a co-signer who helps the applicant build credit. Not all issuers allow co-signers.

Credit cards can seem confusing, especially to a young person inexperienced with personal finance, but they don’t have to be. Keep your teen informed about responsible credit card use now, and they’ll thank you later. 

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About the Author

Oscar Tirabassi is a writer who values reporting on everything from personal finance to public policy.

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