Teach teens to use credit cards responsibly

If your teenager is about to graduate from high school, he or she may soon be applying for a credit card. As a parent, you can provide advice on the smart use and management of credit cards from the very start of your teen’s credit history. With your guidance, your teen can develop a healthy attitude toward credit, and build a sound credit history that can be beneficial in the future.

Here is some basic advice you can discuss with your teen:

Try to use credit cards only to build a credit history and for emergencies.

Credit cards can provide an easy way to create a pattern of positive credit behavior, which will help when applying for future loans and credit cards.

To build that pattern, you can purchase a few things on your credit card during the month, and then pay off the balance in full, on time, when the statement comes in. It’s easy to let things slip when you have that purchasing power in your hands for the first time, so try to commit to a few small purchases each month that you know you can pay off quickly.

In emergencies, a credit card can help at the moment, but you’ll want to create a plan soon afterward to manage the new balance and pay it down as quickly as possible. The longer the balance remains on your card, the more you’ll pay in interest, and the less money you’ll have available for spending on items that you need.

Set your own credit limit. Spending within your means will help you avoid interest payments and larger financial problems down the road. Your credit card may come with a credit limit, but you can set your own credit limit, tailored to what your budget can afford each month. This way, you won’t have a problem paying off your balance in full each month.

It also can help if your personal limit is less than 25 percent of your credit card’s total limit. The percentage of available credit that you use, or your “credit utilization,” can have a major effect on your credit score, and consequently on your applications for new loans and credit cards in the future. If you consistently stick to a low credit-use percentage, you’ll increase your chances of maintaining excellent credit for the long term.

Understand the cost of paying late. If you’re late paying your credit card bill, you incur more than a bad mark on your credit history. A late payment will add late fees to your balance and may even trigger a penalty APR, in which your future expenses are charged at a higher interest rate.

As soon as you know that you’re going to have trouble paying a bill, ask for help, so that you can resolve the problem before the due date.

Set your own minimum payment. The minimum payment on a credit card bill is often a very small percentage of the total balance. It leaves you with a high remaining balance, and consequently a high interest payment for next month. You can set your own minimum payments by choosing to pay an amount that is more than the minimum due, and sticking to that amount in upcoming months, until your balance falls to zero.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 19 years experience in retail banking and with financial institutions in Guam and Hawaii.  You can email him at  moneymattersguam@yahoo.com

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