What Teens Need to Know About Getting and Using Credit Cards

The Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act of 2009 for short) changed the rules regarding teenagers and credit cards. Before this legislation, roughly a third of American teens had credit cards. Today, you can’t get a credit card unless you are:

• 21 years old or older
• Under 21 but opening the credit card account with a parent
• Under 21 but can prove you have “independent means of repaying any obligation arising from the proposed extension of credit”

These rules were put into place because it can be easy to get into financial trouble when first using a credit card. Before getting a card, it’s important to learn about credit and how to use it properly.

Understanding Credit

When you use a credit card to make a purchase, you are essentially borrowing money from the organization that gave you the card (the bank, credit union, or other financial institution). By using the card,  you’re promising to repay the “loan,” or at least make a minimum payment, when your credit card bill (AKA “ statement”) arrives.

If you don’t pay the full amount on your statement, the part left unpaid is carried over to the next month—and this is very important— plus interest. Interest is the price you pay to the card issuer for borrowing the money and it can add up very quickly.

For example, say you charged $500 for school books and materials, but could only pay $25 a month. If the interest rate on your credit card is 10 percent, it will take you one year and ten months to repay the amount, paying $49 extra in interest. And credit card interest rates are typically much higher than 10 percent. If the rate on your card is 22 percent, it will take two years and two months to repay, plus $129 in interest. In other words, the use of credit isn’t “free.” It costs money to borrow money, which is what you’re doing.

And, the details of how you use credit are tracked by organizations called credit bureaus that can make your information available to businesses like cell phone companies, apartment complexes, and others where you make monthly payments. If it’s clear that you aren’t handing your credit properly, you may find it hard to get approved. To learn more on what makes up your credit report, click here to read our blog on credit scores.

Building Your Credit History

Lenders are more comfortable approving people if they have a good “credit history” — meaning they’ve used credit and paid off balances in a timely manner. But if you’re applying for your first credit card, you don’t have any history. So, what can you do?

One of the best ways to get started building your credit history is to get a “secured credit card.” This type of card is backed by money you deposit in a savings account to “secure” what you can use. The amount of credit available to you is equal to the amount of your deposit. Because the card issuer can claim the funds in the account if you fail to pay, they don’t have as much risk and are more open to providing you credit.

Another approach is to get a store or gas credit card. These types of companies often have easier qualifications for getting approved. The card can only be used at the specific store or gas station, and the interest rate is often higher than other forms of credit. But it is credit, and if you use it wisely, other lenders will look upon that favorably.

You can also be added to your parent’s account as an authorized user, if they agree to do that. This should help build your credit without the full responsibility falling on you.

Shopping For a Credit Card

Once you’ve proven your credit worthiness, you’re ready for an unsecured credit card. Each card provider has different features associated with their cards, so be sure to shop around. In doing so, you should look for the following:

• Low annual percentage rate (APR). The lower the APR (the interest you are charged on balances), the less you pay on balances carried from month to month. 
• No annual fee. Some cards charge a fee simply for having them. If you’re new to credit, you may have to pay an annual fee. After a year or so of responsible use, you can ask for the fee to be reduced or eliminated.
• Long grace A grace period is the number of days (generally 21 to 30) you have to pay your bill in full before interest is added. The grace period typically applies only to new purchases, but in some cases, it is completely eliminated if you carry over a balance from a prior month. Be sure to check this on the credit card application.
• Low cash advance fees. Some credit cards let you withdraw cash from your credit line. However, this is a practice you should avoid. Average service fees are 2-3 percent of the advance, interest kicks in immediately, and the rate for cash advances is higher than normal card purchases.
• Low penalty . Hopefully you don’t find yourself in this situation, but you should look for minimal penalties and low fees just in case unexpected circumstances prevent you from making a payment on time.

Using Your Credit Wisely

After getting your credit card, it’s important that you use your credit carefully. Here are some things you can do to show you are a responsible credit user:

• Charge only what you can afford to pay off. It can be tempting to purchase something you really want without thinking about paying for it later. However, it’s important not to accumulate a large debt, which can become a serious burden down the road.
• Pay more than the minimum payment due. Try to always pay your full balance each month. If for some reason you can’t, pay as much as you can.  If you only pay the minimum amount due, it can take a long time to eliminate the balance, and all the while, you’re paying interest on that amount.
• Make payments on Time. Failing to pay on time not only means you get a penalty; it looks bad on your credit report.
• Limit the number of credit cards you have.  Having too many cards can hurt your credit score. Plus, the more cards you hold, the more likely you are to use credit!

Your Credit Score and Credit Report

As mentioned above, your use of credit is monitored by the three U.S. credit bureaus: Equifax, Experian, and TransUnion. They use this information to produce what’s known as a “credit report.” Information on how you manage your credit is also used to calculate your “credit score”. The higher your score is, the more comfortable lenders are with giving you credit. Plus, a high score can translate into more affordable loans, an employment edge, better insurance rates, no deposit required on utility accounts and better housing opportunities.

The bottom line is that using credit cards responsibly and building a strong credit history can have a big impact on your financial future. And to help you get there, Florida Credit Union has partnered with EverFi to provide our members with financial education options to help improve your credit, increase your savings, prepare for retirement, and much more. Also, look at our blog on how to give your credit an Extreme Makeover.

For more information on credit options from Florida Credit Union, visit our Credit Cards page.