Credit Card Applications Provide Opportunity for Parents to Communicate with Teens about Money and Credit Card Debt
The process of completing credit card applications provides an opportunity for parents to communicate with their teens about money and credit card debt. While learning about how to manage their cash and how to apply for a credit card, parents can explain the importance of establishing credit. They can emphasize the importance of maintaining a good credit history and that without good credit, it may be difficult if not impossible for them to rent a car, lease an apartment or purchase anything over the telephone or through the internet.
Although a credit card provides an opportunity for teens to establish a credit history, it is important for them to understand that having a bad credit history is worse than having no credit history at all. Since most adults who use credit cards on a regular basis do not know the terms of the agreements for the credit cards they use, this can be a time for both parents and children to educate themselves about the high cost of credit card debt by reading the fine print on the credit card applications together. They can discuss the annual percentage rate (APR), how interest accrues on the unpaid balance and the fact that there is no legal limit on the amount of interest or fees that can be charged by credit card companies.
Parents can provide examples of how the cost of what is purchased goes up dramatically when credit card balances are not paid in full – an eye opening experience. For example, it would take 283 months to pay off a $3,000 credit card debt if you pay only the required minimum of $75 per month (calculated at 2.5% of the current balance) with a 19 percent interest rate on the card. It would take 42 months to payoff the same debt if you pay $100 per month.
Whether the outstanding balance can be paid off every month is a function of a student’s income (allowance, income from a part-time job, and other sources) and the amount charged on the card. According to a study by Nellie Mae, a prominent provider of student loans, only twenty-one percent of undergraduates pay off their card balance every month. In fact, the average outstanding balance on undergraduate credit cards was $2,169 in 2004. If the balance will not be paid off every month, parents can establish an appropriate dollar limit that can be charged on the card each month.
Parents should be aware of the increase in credit card usage as student’s progress through school. Parents should also be aware that their teens may receive numerous credit card applications starting before their freshman year and continuing through to their student's senior year. According to the study, fifty-six percent of seniors carry four or more cards compared to only fifteen percent of freshmen who carry that many. Also, seniors reported having an average balance of $2,864 while freshmen reported having an average balance of $1,585.
In addition to ensuring that their teens understand the idea of paying their credit card balance in full, parents can teach their child about keeping the credit card safe, what to do if the card is lost or stolen and about shredding unwanted credit card applications to help prevent identity theft. In addition to ensuring that their teens understand the idea of paying their credit card balance in full, parents can teach their child about keeping the credit card safe, what to do if the card is lost or stolen and about shredding unwanted credit card applications to help prevent identity theft. One way to help prevent identity theft from happening in the first place is to take a proactive approach with identity theft protection through a firm, such as .
Periodically, parents should review their teen’s credit card
statement and discuss their purchases and spending patterns. By doing
so, they can judge whether their child is using the credit card
responsibly. Are they paying off the credit card balance in full each
month? Are they making inappropriate purchases? Are they incurring late
fees? By meeting with their teen, parents can help them monitor their
budget and suggest ways for them to remain disciplined about their
purchases and avoid the excessive use of credit cards to pay for
everyday expenses. Credit card statements offer clear evidence of what
teens are spending their money on and whether their spending is
increasing over time. Through these discussions, teens will learn to
distinguish between expenses that are 'wants' and those that are
'needs’ which can help them determine the best way to use their
purchasing power.
Return from Credit Card Applications to Financial Planning