During my coursework in high school I never learned about personal finance, credit cards or what to do with money earned from after school part-time jobs. Luckily my parents had taught me about banking and saving money. Early on during elementary school I became part of the Washington Mutual program School Savings. This was my first experience with money, how to use it and what to do with my allowance earned from weekly chores. Every Wednesday during lunchtime, I would would visit the “banking room”. Actually, it was more like a closet because only a few students could visit at once. I would bring my blue checkbook and envelope filled with a few dollar bills that I had earned that week and I deposited it with the “bank lady.”
I loved depositing my money because it made me feel grown up and responsible (The office supply prizes that you received from depositing money was another perk). Therefore, from an early age I had learned the value of money, what to do with it and how to save it. My experience with the School Savings program was a positive one and a program that should continue. The purpose of this post is to share my experience with personal finance, the lack of it during high school and the great significance that personal finance plays with today’s youth and tomorrow’s future.
First Purchase: My First Car
After participating in School Savings for many years, I eventually had saved up enough money by the time I turned 16 to purchase my first car. Even though it cost around a thousand dollars, I still loved my car more than anything. From saving money since the time I was five, I had learned the value of money, how to save it and spend it responsibly. Back then I had no idea that people could spend more money than they had in their bank accounts. In high school I had one debit card that I used on occasion for small purchases such as going to the movies or a latte.
Credit Cards: Enticing Offers and Learning the Catch
As soon as I turned 18, the banks were after me. Every time I went to the bank (Washington Mutual) at last on person would ask if I was interested in a credit card. Who would offer a credit card to a 18-year-old with no current job and little savings? And besides that who would offer a teenager a credit card with a $1,000 credit limit? Almost all banks that I have been associated with offered me credit cards. I received multiple credit card offers ever week from Discover, Capital One, Citi, Bank of America, Washington Mutual and American Express. Every credit card offer stated that I was pre-approved for a $1,000 credit limit sometimes even $2,000. All I had to do was send back the paper work and the deal was done. The catch: An annual interest rate of 25 to 30 percent. Banks extend far to much credit to teenagers and college students and have become the number one target for credit card companies. How can this business strategy be profitable for credit card companies if teenagers end up with debt and might eventually file bankruptcy?
Credit Cards for Teens: Good or Bad Idea?
In the article “The Truth About Teens and Credit Cards,” by Dave Ramsey states that, “Over 80% of graduating college seniors have credit card debt before they even have a job.” What every high school student should know is having a credit card has benefits and costs.
The Benefits: Having a credit card establishes credit only if used responsibly. To use credit cards responsibly is to 1) use just 25 percent of your credit limit or less. This means that if your credit limit is $1,000, your cumulative amount charged should be $250 or less. 2) ALWAYS pay your entire monthly bill in full. These two pieces of advice are the most important and essential keys to establishing and maintaining good credit.
The Costs: Obviously, if you charge too much on your card and don’t pay it off every month, interest will compound and end with debt and poor credit. Teenagers and college students need to realize that credit cards are just a line of credit, not free money. Whatever you charge on your card, you should always be able to pay it off and have enough money currently in your bank account. If you do not pay your monthly bill in full, you will be hit with interest (usually 25 to 30 percent for young adults) and sometimes a late payment fee.
Unlike Dave Ramsey, I do not object to giving a 16-year-old a credit card. I would advise to get a credit card from your local Credit Union because they usually have lower interest rates and establish a low credit limit (For example around $200). Also I would not advise to use the credit cards for daily purchases because it becomes difficult to keep track of purchases. Instead, use the card a few times a month on larger purchases. For teenagers under 18, it is up to the parents to decide if a credit card is a responsible option and parents should always set limits and enforce these limits. For college students, you are now responsible for yourself and should use credit cards wisely and cautiously.
This advise is something that I was never told in high school. I had to learn how to responsibly use credit cards on my own, but this advice should be passed on to every teenager. Once you get in the habit of using credit in a responsible way, it is easy to continue and will significantly benefit your credit score, your wallet and financial future.
Below are some interesting articles about credit cards: