The Reality Of Teenagers and Credit Cards

The personal finance advice charity (the money charity), said teenagers who grew up thinking that debt was acceptable would fuel Britain’s current crisis.

One in five teenagers believed that getting a credit card would allow them to buy things that they would not otherwise be able to afford, while one in 20 of those questioned believed that there was no need to pay back credit card debt at all.

The survey of more than 1,000 14- to 18-year-olds found that nearly a quarter of teenagers thought that having a bank overdraft would allow them to spend more than they earned every month.

Availability of credit cards have left young people in debt.  College-age students and low-income consumers, are easy targets for credit card companies, mainly  because of their poor financial literacy knowledge. In 1996, teenage adult consumers owed an average of $2,400 on their credit cards, nearly triple what they owed in 1990, according to research by Claritas Inc., a marketing research firm in Virginia.  If, payments of $75 were made monthly to pay off a $2,400 debt, it would take 3-1/2 years with a 16 percent-rate card, and you’d pay $ 750 in interest.

The three key points parents need to clarify with kids today in order to prepare them for the right decision making when they have credit cards in their hands are:

All debt is not the same

Kids may think that everything from a car loan to a college loan to a payday loan has the same consequences, since they seem to function by the same basic rules. Parents can explain that the terms of the debt and how the debt is used determine its effect on personal finances.

Credit cards charge interest, they take a percentage of the money you owe and add that to the next month’s bill.

For instance, say you owe $400. Even if you pay the minimum amount due and don’t use the credit card to buy anything else, the next month you will owe more than $400. Believe it or not, it might not be long before the $400 turns into $800 and so on.

Credit score

Most Americans’ credit scores fall within the 680 to 720 range. A score above 740 typically qualifies you for lower interest rates.

A credit score is a statistical number that depicts a person’s creditworthiness. Lenders use a credit score to evaluate the probability that a person repays his debts. Companies generate a credit score for each person with a Social Security number using data from the person’s previous credit history. A credit score is a three-digit number ranging from 300 to 850, with 850 as the highest score that a borrower can achieve. The higher the score, the more financially trustworthy a person is considered to be.(Investopedia)

Let’s say you want a 30 years mortgage, if your credit score is 760 your interest rate will be 3.2% but if your score is 630 your interest rate will be 4.8% considering that you are less likely to pay back.

Credit report can follow you for years to come

The impact of credit inquiries and negative activity diminishes over time but generally doesn’t disappear for years. Even if you pay off overdue debt quickly, it can take seven to 10 years from the delinquency date for negative marks to be removed from your report.

Talking to your child about credit cards is as critical as teaching them to drive, and teaching them about drugs and alcohol. No matter what your stance is on credit cards, whether you believe they’re good or bad, it’s your job to teach your kids about credit cards before the credit card issuers send one in the mail.

Watch the story of Robyn Beck, your kids will probably make the same decisions if you don’t start teaching them now!