This article is part of a series teaching essential personal finance concepts to teenagers. At Money Under 30, we believe that it’s never too early to become financially responsible; we hope this series will be a good place to start.
As a teenager, you see a credit card, and your eyes light up. After all, it’s free money, isn’t it? Yes and no. While credit cards give you an alternative to cash to help pay for goods, they can become a severe burden if you fail to pay them off.
It’s important to know how to use a credit card, because they can help build your credit. Building up credit gets you a step closer to making life-changing decisions, whether you have eyes on a car or place of your own.
Here are some basics you need to know before making that first swipe or tap.
What is a credit card?
Credit cards are far more than pieces of plastic connected to an account that provides an easy way out when you’re short on cash. Lewis Smith, the vice president of finance at Bayport Credit Union, insists that credit cards are a teaching experience. Like guardrails on the street, using and monitoring your card will keep you on the road to financial triumph if you’re responsible enough to handle it.
A credit card contains a magnetic strip on the back, with your account number, name, and expiration date on the front. Beyond that, it allows you to use the bank’s money instead of your own to pay for items when you’re in a bind.
Though it bails you out at the register, you still have to pay back the bank over time, or you could be charged late fees and interest. It’s not your money, and you have to return it at some point.
How do you use a credit card?
Using a credit card in literal terms is pretty easy, just insert into a card machine, swipe or tap, and you’re good to go. But it’s a bit more intricate than that.
Credit cards have limits, whether it’s $500, $1,000, or more. And they offer you a fair share of student benefits, whether it’s American Express or other notable banks. When using a credit card, you have to spend within those limits.
Pay off your credit card bills before they are due if you can. This creates a good reputation with your bank and the companies you purchase goods from. An excellent reputation and line of credit can help you get discounts, make you eligible for better interest rates, and improves your chances of making dream purchases.
Your first car, getting an apartment or house, being able to travel across the world—all these things become more realistic once you maintain good credit.
Credit card statements
Every month, you get a credit card statement that shows all your spending for that specific period. From there, you have a grace period to pay the due amount in full or make a minimum payment. If you pay the bill in full, you won’t incur any interest charges or late fees. However, if you only make a minimum payment (usually one percent of the total balance or the total interest), you will carry the balance over to the next month and also be charged interest.
It’s vital that you keep receipts of all your purchases so that you can ensure nothing on your credit card looks unfamiliar. If something looks off, call your bank as soon as possible.
The benefits of a credit card
Credit cards are a great way to help you organize your expenses and keep them at a premium as well. If you’re not a math major and don’t have the time to enter your expenses in a book, your credit card keeps a record of all your purchases. It provides a mirror of sorts to your spending habits, and if you don’t like how those habits reflect on you, it’s time to change your approach to money.
But what benefits are there to having a credit card? After all, it’s not your money, and borrowing money can be an uncomfortable feeling. But these cards and the banks they’re attached to are there to lend a helping hand. They offer top-of-the-line security which prevents you from being a victim of fraud or identity theft.
Many purchases also require a credit card. For example, credit cards are best suited for online shopping, booking flights, and they are ideal for travelers because they can be used in most countries.
Plus, you can gets rewards. You like freebies, don’t you?
By building a good credit score, you can get low introductory rates, air miles, and cash back for various things. Who said hard work doesn’t pay off? Some student credit cards also offer perks for students who maintain good grades.
Furthermore, you can get warranties or purchase protection in case something happens to an item through your credit card.
The dangers of having a credit card
Credit cards can make paying for things easy, almost too easy. It’s a convenient cash replacement, but it can make you think that you can pay for anything without consequence. That sort of thinking can lead you down a dangerous road, one that involves debt and maybe having to ask your parents to try and cover for you. Not a good feeling, is it?
At least with cash, you can’t spend more than you have. You know your limits as soon as you look in your wallet. With a credit card, you can be under the illusion that there’s no limit to your spending.
While your bank will give you pointers on how to use your card, they won’t necessarily stop you from passing your limit. In some cases, banks will approve your transaction just so that they can charge you late fees.
This can lead to bad credit. Bad credit means you won’t get approved for major purchases and could cause you to pay more for a product that you otherwise would.
Frank Holmes, the chief executive and chief investment officer at U.S. Global Investors, warns that credit cards can be very dangerous for teens with student loans. If you’re going to get a card, ensure you can pay it off. But, if you can’t trust yourself or don’t make the income to help you make payments, steer clear.
If you’re 18 or 19, you have a wide range of options so you can qualify for a credit card. Most banks will approve you as long as you’re making money. But, if you’re a student without an income or credit history, you can still become eligible for a credit card.
If you’re under 18, your choices are limited. You can still gain access to a credit card but will have to sign up as an authorized user on your parent’s or guardian’s credit card. Your parent/guardian can make a request to their bank to add you to their account. Be careful though. Any purchases you make on that credit card will affect you and your fellow card holder.
You can also get a secured credit card, which is like a regular credit card but requires a security deposit against its credit limit.
What is a credit score?
A credit score is a number assigned to individuals to determine their abilities to repay loans. Jean Chatzky, an award-winning financial expert, and journalist points out multiple credit score checkers such as FICO, VantageScore and others that you can use to check your score.
However, given that you’re only beginning to build a solid credit history, your focus should be on improving it.
Best credit cards for young people
There are a lot of credit cards out there, but only some offer the best terms. For those new to credit cards, check out some of these credit cards:
- Best Credit Cards For College Students
- Credit Cards For Fair Credit
- Best Credit Cards For Study Abroad
- The Best Credit Cards For Building Credit From Scratch
- 8 Best Gas Credit Cards That Will Help You Save At The Pump
Credit cards require diligence and trust, helping you become more responsible with your money. Despite the ease of access and independence it provides, these cards are part of a partnership between you and the banks who loan you the money. If you can pay off your credit card and use it only when necessary, that partnership can be a fruitful one.
When is the best time to get a credit card? When you’re ready and if you think you’re ready now, these basics should help you understand what you’re getting into. Good luck!
Read more about finances for teens
Banking 101—A Guide For Teenagers (And Anyone Who Needs A Refresher)
Budgeting For Teens—Grow Your Money While You’re Young
How To Make Money—A Guide For Teens
How To Spend Money Wisely—A Guide For Teens
7 Tips On Saving For College As A Teen
The 8 Most Important Employee Rights Teens Should Know
Credit Card Basics —A Guide For Teens
6 Money Lessons Our Parents Learned In School, But We Didn’t