If you’re like many parents, you’re hoping your kids enter an institution of higher learning following their high school years. Along with that newly found independence come new experiences and responsibilities. One of the most important talks you should have before they venture out is how to manage money and, in particular, how to responsibly handle a credit card, if they decide to apply for one. The conversation is a necessary one that will arm them with the right information to help secure they’re financial future.
Lesson One: How you handle a credit card will affect your future in ways that may not be obvious to you, now. Over time everyone establishes a credit history that shows how he or she is able to handle money. This record is used to calculate a credit score. Credit cards can have a positive effect on the score, if you pay on time and keep within your credit limit. Lenders use this score to decide whether to approve an application for a mortgage, automobile loan, personal or other type of loans.
Lesson Two: The financial success of life after college lies in taking a genuine interest in the details. Whether you’re choosing a bank, investment company, employer or credit card, when it comes to anything dealing with money the details are in the fine print. In regard to credit cards, the terms and conditions of each agreement varies and can mean the difference between reasonable and costly charges for the privilege of borrowing. Fees and rates can add up quickly. Terms that you should understand to make a wise selection when choosing a credit card include:
- Annual Percentage Rate (APR) – The interest rate the lender will charge for carrying a balance over from month-to-month. Look for a low rate; a high one will cost more.
- Annual Fees – Typically charged on the anniversary date of opening an account, annual rates range from $25 to $300. Look for a no or low fee card.
- Convenience Charges – Balance transfer fees apply when you move a balance from one account to another, usually to save on interest charges. Cash advance fees are added when you take cash from the account using a check designed for this purpose. Strategic use of a balance transfer can help save money, but steer clear of convenience checks that charge exorbitant rates.
- Penalty Fees – Pay late and you’ll be charged a maximum $25 fee. Go over your credit limit and your card company can impose a penalty but only for one billing cycle. A penalty rate increase can be imposed for late payments of more than 60 days and remain in effect for six months, when the rate may be lowered again if during that time you made prompt payments. The exception is a cardholder who makes three late payments—then the penalty rate will stick.
Lesson Three: Using a credit card responsibly takes discipline and commitment. Begin by limiting the number of cards to only one or two and only use them for purchases you can pay off when the statement arrives. Never use one for impulse purchases; frivolous spending will result in an out-of-control balance that may be hard to pay down. Make your monthly payment on time.
If your student pays attention to even half of the advice you share, they’ll be well ahead of where many of their peers will start out. Starting out with the right information may help them avoid the hardship of learning the hard lessons through personal experience.
About the Author: Noreen Ruth is a regular contributor to a wide variety of financial-related blogs and websites. She specializes in credit and debt-related issues, and provides useful information to help consumers choose the right credit cards and make prudent financial decisions. Follow her regular posts to stay up-to-date with the latest credit card news, reviews and more. To learn additional information about student credit cards, visit AsapCreditCard.com.