In Australia, the minimum age for a primary account holder of a credit card is 18 years of age. Depending on the card issuer however, it may be possible for subsidiary cards to be issued to younger teenagers on behalf of the primary account holder. Whilst a large number of card holders are able to manage their credit limits responsibly, there are a growing number of individuals who end up finding themselves in financial difficulty. With the sheer volume of cards (and offers) out there today, it is more important than ever to teach kids about the pros and cons of holding a credit card and how to use them wisely.
When used properly, credit cards can be a safe convenient way of paying for goods and services. They are easier than carrying cash, they are accepted at millions of physical locations as well as online and you can purchase things immediately when you don’t have the money on hand. Depending on the card, you may also be eligible for a variety of rewards. Conversely however, credit cards can make impulse purchases easier which can then add up and blow your budget and if you carry a balance forward you will pay interest which increases the real cost of the items you purchase. In addition to this, credit cards require discipline and mistakes can result in fees, interest rate increases and damage to your credit history.
Children should know that a credit card isn’t free money. You should charge only what you can afford to pay back and you pay for the privilege. When discussing this issue with your kids, here are the credit card basics:
Annual Fees – The annual fee is applicable whether or not the card is used. Some cards charge a substantial annual fee just for the privilege of holding the card whereas others carry low or even no annual fees. In these cases however, the lack of an annual fee is often tied to a higher interest rate for purchases which may turn out to be more costly in the long run.
Grace Periods – Most credit cards give a certain amount of days to pay the bill before any interest will be charged on purchases although some will offer no grace period and charge interest from day one so it is important to check. The grace period only applies however when you pay-off your entire balance due each month. If you only pay the minimum payment, interest is immediately accrued from the moment you charge something to your credit card.
Interest Rates – Rates are expressed in annual terms even though the bills will come monthly. If your credit card uses different rates for purchases, transfers, and cash advances, realize that the card issuer may pay the lower interest rate balance first. Consequently, if you carry a balance forward, your high-rate cash advance may not be “paid” until all lower-rate balances are paid in full.
Some cards have an initially low rate as an incentive for new users which remains in effect for only the first 6 months of the card issue after which it will jump to a much higher rate. There may be greater benefit however in going for an overall medium rate than an initial incentive rate which moves to a comparatively high rate. If opting for a fixed rate card however, be aware that these are not fixed forever. Rates can be changed at any time, as long as the card issuer provides the required amount of advance notice of the change in terms. Fees may also increase. These “Change in Terms” notices are usually included with your monthly statement.
Other Items – While annual fees, introductory rates, and interest rates are the main features to check out, users should also look for any penalty interest rates (interest plus an additional amount) that may be imposed for violating the terms of the credit agreement (for example, exceeding the credit limit or failing to pay on time). They should look for cash advance terms that may be unfavorable (for example, a higher interest rate on advances than the rate charged on purchases).
In addition to this, users should be wary of offers of no payment/no interest for a period of time. Frequently offered by furniture and electronics stores, these can be good offers, but make sure the fine print is understood. Generally, you need to pay off the entire balance before the end of the “free” period to receive the benefit. Otherwise, you will probably have to pay interest on the entire balance from the date of your purchase.
If your child is intending to apply for a credit card or you are considering issuing them a subsidiary card under your account for which you will hold them responsible, here are some tips for teens on managing a credit card:
- Decide in advance of getting a card what it will be used for
- Start with a small credit limit if possible and learn to manage it effectively
- Understand the fine print
- Always pay on time
- Try to pay the total balance each month or as much of it as you can manage
- Avoid having multiple cards
- Cancel unnecessary or unused cards
- Call the issuer if you are ever going to be late with a payment
- Notify the issuer immediately if you change your name or address
- Examine your bill
- If you ever have any disputes, put them in writing
- Never let anyone else use your card