Some of the facts around credit cards are easily missed. Did you know, for example, you can say “no” to an interest rate change? Or that your card may not work abroad? If you didn’t, you’re not alone. Those details are more likely to be found in a card issuer’s small print.
Legally, your teen can’t have their own credit card account until they’re 18. But from the age of 13 they’re allowed to be an authorized user on yours. Should your teen have a credit card? It’s a lot of responsibility.
Before you decide, you’ll want to be sure they’re armed with the facts. So if you’re thinking of having that talk with them, here’s what they need to know.
Credit card facts your kids should know
Interest rates, APRs and credit limits can be confusing for adults, let alone young people. First, make sure your kids understand credit card basics. There’s a helpful article on teaching kids about credit on our blog.
Then you can dig down into the details:
- Credit limits can change
- There’s a minimum payment you have to pay each month
- Pay off your balance every month to avoid paying interest
- Credit cards charge extra fees
- Your interest rate can change
- You can refuse an interest rate change
- Most card issuers protect your payments
- Some credit cards come with perks
- Borrowing on a credit card impacts your credit report
- Too many credit cards can hurt your credit score
- Not all credit cards can be used abroad
- An alternative to credit cards for your kids.
1. Credit limits can change
Credit card companies set a limit on the amount you can borrow. This is called a credit limit. Say it’s set at $500. As long as your balance (how much you owe) never goes over $500, you can keep using your card.
Your card company decides your credit limit and they can change it whenever they like. If you pay off your statement balance in full each month they may increase your limit. On the other hand, if you’re struggling to make regular payments, they might reduce it instead.
2. There’s a minimum payment you have to pay each month
You don’t have to pay off your credit card balance completely each month, but you do have to make a payment towards it. This is called a minimum payment.
Your card issuer sets the amount of your minimum payment. It’ll either be a small percentage of your balance or a fixed dollar amount. It depends which is greater.
As a general rule of thumb:
- If you owe over $1,000 your minimum payment is usually around 2% of the balance.
- If your balance is between $25 and $1,000 it will be a fixed amount. (This can vary from card to card, but it’s typically about $25.)
- If you owe less than $25, your minimum payment is likely to be exactly what you owe. So if you owe $10, that’s your minimum payment.
3. Pay off your balance each month to avoid paying interest
Only making the minimum payment each month is not a good idea. You’ll be charged interest on the balance for as long as it’s outstanding. As interest can seriously add up, you could end up owing a lot more than you borrowed in the first place. And it may take you a lot longer to repay your debt.
How much interest you’ll be charged depends on what your interest rate is. It varies from credit card to credit card. But to give you an idea, the average APR is between 18.66 and 25.7%.
Try explaining it to your teenager this way:
Imagine you just graduated high school and you’re heading off to college in the fall. You’ve just been sent a list of textbooks you need for the start of the semester. They’re going to cost you $500
When you worked out your budget for college, you forgot about paying for textbooks. You don’t have $500 to spare, what with all the other expenses. How will you pay for them?
Say you buy them on a credit card with an APR of 22%:
- If you make the minimum payment of $25 a month it’ll cost you $628 in total and take you 26 months to repay.
- If you pay off $30 a month it’ll cost you $602 in total and take you 21 months to repay.
- If you pay off $50 each month it will cost you £557 in total and take you 12 months to repay.
And remember, all the time you’re paying off your debt, you won’t have that money to spend on other things you need.
4. Credit cards charge extra fees
As well as interest, credit card companies can charge other fees.
If you don't make your card payment by 5 pm on the due date card companies charge you a late fee. According to the Credit Card Accountability Responsibility and Disclosure (CARD) Act the first time you’re late paying the fee cannot be over $30. But pay late again anytime over the next 6 months and it could be as much as $41.
Pay your monthly statement balance on time and in full to avoid extra charges.
You can use a credit card to withdraw cash from an ATM, but think hard before you do. When you use a debit card at an ATM you’re withdrawing cash you already have in the bank. But whenever you use a credit card, you’re borrowing.
Taking cash from an ATM with a credit card is known as a ‘cash advance’. You pay more interest on cash advances than on purchases you make with a credit card. You’ll also be charged a fee of between 3% and 5% every time.
Avoid paying extra fees and interest. Use cash advances only in an emergency.
5. Your interest rate can change
The top 10 credit card-issuing banks are federally chartered. That means they don’t have to follow state laws limiting interest rates. As long as they give you 45 days’ notice, they can hike your rate as high as they like.
They can also change the way they calculate your interest – from fixed to variable. So instead of charging you a set amount, your interest rate could go up or down, depending on the market.
Thanks to the CARD Act, your interest rate is protected for the first year. Unless you’re more than 60 days late with a payment. Then you lose that protection.
To avoid interest charges, pay off your balance in full every month. And read every text, email, or letter you receive from your credit card company. That way, if for some reason you can’t clear your statement balance, you can budget for what you’ll owe the month after.
6. You can refuse an interest rate change
You have the right to say no to an interest rate rise. The Credit CARD Act says so.
If you do, bear in mind your card issuer can reduce your credit limit or increase your minimum monthly payment. They could even close your account. But if they offer you a deal to keep your old interest rate, be sure to get it in writing.
What card companies can’t do if you refuse a rate rise is demand you pay off your balance immediately. You’re allowed at least five years to pay it off at your existing rate.
7. Most card issuers protect your payments
Say you use your credit card to buy something online and when it arrives it’s faulty. Or worse, it never turns up at all. If you tried to work it out with the seller and they won’t budge you can ask your card company to contest the payment and get your money back.
By law, you have to challenge a bill within 60 days of receiving it and you’re only protected for purchases made in your state or 100 miles from your home. Credit card companies give you 120 days or more. They’ll usually let you contest any payment no matter where it was made.
If you lose your credit card or suspect your card details have been stolen, tell your card issuer immediately. As long as you do this, you’re only responsible for the first $50 of unauthorized charges. Always know where your card is and keep all your receipts.
8. Some credit cards come with perks
Some credit cards come with extra perks and rewards, like airline miles, cashback, travel insurance, rental cars, hotel stays, and gym memberships. It’s often on a points system.
To tempt you into opening an account, card companies often have a welcome offer. You’ll earn extra rewards if you spend a certain amount of money in the first few months, for example.
9. Borrowing on a credit card impacts your credit report
Your credit report shows where you live and work, and if you’ve ever filed for bankruptcy or been arrested. It also lists your bill payment history, loans, and current debt. Lenders use this information to decide if they’ll offer you a loan or give you credit.
Even if you pay off your credit card balance in full every month by the due date your credit report may be affected – and not necessarily in a good way.
That’s because card companies report to the credit bureaus in between statements. And in between statements you may be using your card. When your card company reports and your balance is more than 30% of your credit limit, it won’t look good to lenders.
Of course, that’s only a problem if you’re thinking of applying for a loan at that particular time. And there is a way to avoid it. Keep track of your credit card balance and pay off transactions as soon as they appear on your account.
10. Too many credit cards can affect your credit score
Your credit score is a 3-digit number worked out from your credit report that shows how responsible you are with money. Lenders use it to see if you’re a safe bet. A high score can make it easier for you to get a loan or rent an apartment, for example.
If your card gets lost or stolen, having a backup may be useful in an emergency. But having too many credit cards – even if you never use them and they have zero balances – can lower your credit score.
If there’s been no activity on your account for several years, there’s nothing to show how responsible you are with credit. So your card issuer may stop sending updates to credit bureaus.
To avoid this, spend small amounts on your credit cards and pay off the balance in full on their due dates.
11. Not all credit cards can be used abroad
Not all US credit cards work internationally. So if you’re headed overseas on vacation you’ll want to check your credit card is accepted in the countries you’re visiting.
It’s also a good idea to tell your credit card company if you’re traveling abroad. If you don’t, and they think the activity on your account looks suspicious, they may suspend your card.
12. An alternative to credit cards for your kids
Having talked about credit cards with your kids you may decide they’re not ready for one. There is an alternative. The GoHenry prepaid debit card and app for 6-18-year-olds.
Unlike a credit card which lets you keep borrowing up to a certain limit, a prepaid debit card only works when the money is there to spend. GoHenry gives your kids financial independence and you peace of mind. From a single app, you can pay in money instantly, set up regular transfers (like your child’s allowance) and set spending limits. Plus, you get notified the second they spend.
What’s more, our in-app Money Missions tool teaches kids how to be financial wizards through fun, age-appropriate, bite-sized lessons, quizzes and games.