Credit cards can be a powerful tools for consumers but, as viewers learn in Spider-Man, with great power comes great responsibility. And the words “responsible” and “teenager” do not usually go hand-in-hand.
After working with high school students for ten years, I’ve come to appreciate how creative, hilarious, kind, insightful, and, yes, mature teenagers can be. Although not all seventeen-year-olds will make responsible decisions 100% of the time, I believe we are selling students short by not giving them some sense of financial responsibility while they are learning what that means. How do we expect students to make good decisions if we don’t educate them?
When it comes to my outlook on personal finance, I adopt a “Rule #1: There Are No Rules” mentality. I don’t believe in a one-size-fits all approach to any financial tip, strategy, or way of life. What works for some does not work for others. I believe that options, education, and possibly some “nudging” (thanks to my new favorite book Nudge from Richard Thaler and Cass Sunstien for teaching me about this concept) is the way to go for adults and students alike.
Some “financial gurus” will
suggest demand parents never give their kids credit cards ::cough:: Dave Ramsey ::cough:: but I believe teenagers can learn the risks of credit cards and practice financial skills while building their credit history. Of course, not every student will manage credit wisely. I’m not calling on credit cards to be the hottest gift for all Sweet Sixteens (Do kids even celebrate that anymore?), but I think open and honest conversations about credit, debt, and money in general will benefit young people. Some of my students are already or will be 18 years old in a few months, which gives them the ability to make financial decisions that can impact their lives in significant ways.
Research shows the decision-making center of the brain is not fully developed until about age 25 so it’s no wonder credit card companies market extensively to college students. These college kids may use credit to fund a “yolo” lifestyle without truly understanding the risks to their financial and mental health. I can recall the tables full of banking merchandise at freshman orientation events — you only have to fill out a form and get a t-shirt? Awesome!
In a 2016 survey of college students by Sallie Mae, 23% reported having credit card debt. This figure increased to 39% among college students aged 23-24. Unfortunately, some students may not realize the potential downsides to carrying a balance and other issues like late or missed payments. I do not want my students to set foot on a college campus without ever learning about credit cards.
Telling kids that “credit cards are bad” and simply ending the conversation there closes the door on teaching the nuances of credit. I want my students to recognize the predatory practices of companies, understand what “apr” actually means (here’s a great into video), and be able to assess whether or not they can handle the risks for themselves.
Conversations about credit should not be taken lightly. According to The Federal Reserve Bank of New York’s Center for Microeconomic Data, in the fourth quarter of 2018, household “credit card balances rose by $26 billion to $870 billion…[marking] the first time credit card balances re-touched the 2008 nominal peak.” I would guess that many of my students have parents who make up part of this statistic and may not want to engage in deep discussions about finances with their children. It’s understandable — many of us struggle to talk about money. This is where I see my role when we discuss financial literacy in class: I want to help students have a more clear understanding of the challenges of personal finance and feel comfortable asking money questions.
When we discuss the pros and cons of credit cards as a payment method, students always ask whether or not they should get one. Here are the questions I ask them:
Does it have an annual fee?
This one is an easy one. Obviously you should read the contract for the card, but make sure you’re aware if there’s a fee to simply use the card. There are plenty of options for newer card owners that don’t have an annual fee, so it might make sense to start there. I rarely use one of my first credit cards I applied for in college, but since it does not have an annual fee I keep it open. This shows I have long-term accounts in good standing, which positively impacts my credit score.
A lot of the cards with the “best rewards” have higher annual fees, so know your obligations. Getting a “surprise” charge on your credit card is never good news, so check for any and all fees associated with a prospective card.
Will you pay on time?
One of the biggest perks of getting a credit card is building your credit history — but you can also destroy it with late payments and defaults. Late payments not only hurt in the short-term consequences (late fees), but also in the long-term hits to your credit worthiness. Of course, credit scores can recover from mistakes, but it may take several years.
When it comes to your FICO score (one of the most common forms of credit scores used by lenders) payment history counts for about 35% of your total number. That means only a few late payments can drag down your overall score, creating future problems with obtaining loans or getting low interest rates. (Some landlords also run a credit check, so bad credit can keep you from renting the place of your dreams).
I tell my students, if you have problems sticking to deadlines and due dates at school, credit cards are not the best fit. There are ways to automate credit card payments from your checking account, but if you struggle to keep a sufficient balance in your checking account, overdraft fees can hurt your finances too.
Will you keep utilization low?
In addition to a history of on-time payments, using a small percentage of your credit limit is an important component of having a solid credit score. A credit card limit is not a “green light” to continuously charge that amount every month. In fact, credit card users should keep utilization below 30%, but ideally under 10%. That means for a credit card limit of $1000, users should not charge more than $300 (ideally under $100).
Will you only charge things you can pay back RIGHT NOW?
And finally we get to the biggest consideration — can you be responsible enough to only charge what you can afford? Not what you could afford if you worked your dream job. Not what you might afford next year. Right now.
Many credit card users run into major problems when they purchase things they cannot pay for right away. This is what the credit cards are banking on.
For each month you do not pay your bills in full, interest will be assessed on the balance. This interest compounds over time and can create massive holes for consumers that make it hard to dig out when trying to pay off debt. Simply paying the minimum leaves consumers in cycle of constant, growing debt. Compound interest is wonderful for your investments, but is detrimental for debt.
Do not make it harder for “future you” — if you get a credit card make mindful purchases. Any finance charges from interest can (and probably will) cancel out potential cash back or other rewards like airline miles. It’s not worth going into thousands of dollars of debt for a free flight every now and then.
After we run through this list of questions, I encourage students to talk with their parents about their feelings about credit cards. Again — I do not think all individuals should have credit cards, especially young people with questionable decision-making skills or a lack of awareness of the ramifications of poor credit history. But thinking and talking about credit card usage can help students make better decisions when it comes to their financial life.
Some students told me about how they were going to open a credit card with their parents and I think it’s great for families to discuss their concerns and goals when it comes to finances. Talking about credit cards can be a first step for some families – I am fully on board with parents openly including their children in financial decisions, but also modeling healthy financial behaviors.
When if you get your first credit card (if ever)? Do you think teenagers should have one?