8 Tips to Help Your Teenager Become Credit Smart

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What is the first thing a teenager is going to do with an extra few thousand dollars in their pocket? Spend it of course! (Without any regard to how it's going to be paid back or all of the fees associated with the loan.)

When I was a young adult in college, I remember the credit card companies pitching their tents on career day. They would lure us with gifts and enticing giveaways and promises of a bright future because we were proud owners of a shiny new credit card! After applying for every card I could get, I had 5 beautiful credit cards in my wallet that I would flash just to show how grown up I was, and before I knew it, I was several thousands of dollars in debt and didn't know how I was going to pay it off.

Every time I looked at my credit card bills, it appeared as if the balances were getting larger and larger. I couldn't keep up with the fees and finance charges! With the help of a financial advisor and a lot of tears, I was finally able to get out of debt and save my credit history, but it took time.

Now that I am a mother of two teenagers, credit card abuse is one of the first dangers of financial common sense that I discussed with them. If you do not have the money in your pocket or in your bank account, don't buy it! Use credit for the goal of building a solid credit history and do it with intent and purpose.

Fortunately, In May of 2009 the President Barak Obama signed into law the Credit Card Accountability, Responsibility and Disclosure Act of 2009, or CARD. It will take effect February 22, 2010 and will make it much harder for credit card companies to prey on teenagers and young adults by making it a requirement that the applicant have a job or co-signer

Credit card abuse is easy to fall into, however it is a bit of challenge to rent a place to live or make large purchases without a credit history. Having a non-existent credit history can be as much of a detriment as it is to have a bad one. But there is a way to build a good credit history without falling into the pitfalls of an out of control credit card debt. Here are my tips to help your teenager prepare for responsible credit card ownership.

1. Limit the credit card ownership to two general cards.
    
2. Use a debit card instead of a credit card. It is deducted from your bank account and helps avoid over-spending.
    
3. Have a job before you even think about getting a credit card. (This is in the new bill.)
    
4. Put a fraud alert on your credit report. This will not only protect your credit from fraudulent use, it will also reduce the credit card offers.
    
5. To avoid temptation of accepting new offers, Call 1-888-5-OPTOUT (567-8688) toll free to request that the credit reporting bureaus stop selling your name and address to lenders. This request is good for two years. You'll be asked for personal information, including your name, telephone number, and Social Security number.
    
6. Never sign up for a department store credit card. They catch you when you are the most vulnerable, right when you are reaching for your wallet and cursing yourself for spending more than you should have. The store clerk flashes her pearly whites and offers you a great deal: "would you like to save 15% off your entire purchase by applying for instant credit?" These predators offer the discount because they know they will make a hell of a lot more in fees and finance charges when you charge your purchase. Not to mention the finance charges are through the roof compared to a regular Visa or MasterCard. This article says it all!: Credit Reform and My New 703.8% Card
    
7. Don't carry a balance. Make a purchase once a month well below the credit card limit and pay the entire balance every month.
    
8. Make it a habit to pull your credit report from all 3 agencies every 6 months. You'll be able to catch any discrepancies from the credit reporting agencies and catch any identity theft.

Credit card debt is really a high interest loan in disguise. Here's a breakdown of some typical credit card fees:

• Finance charge: This can be as high as 25 percent on the unpaid portion of your bill each month.
   
• Annual fee: Some companies charge yearly membership fees of anywhere from $20 to $100. Just in case you are smart enough to avoid carrying a balance, they will make sure you pay something with the annual fee.
   
• Cash advance fee: Interest/finance rates and fees are much higher for cash advances — avoid it at all costs.
   
• Late payment fee: Paying late can also result in hiked interest rates.
   
• Over the limit fee: Going even 1 cent over your approved credit limit can trigger an over limit fee of up to $25-$45 for every transaction over the limit. This one adds up very quickly.

Help your teenager understand the responsibilities of credit card ownership and pitfalls that come along with it. Making a wrong move with credit can literally dictate the lack financial power they will have in the future. My credit card woes prevented my ability to buy my first home with my husband, and it was one of my biggest regrets in life.

Additional Resources:
The Federal Trade Commission provides free information to consumers on dozens of topics related to credit and credit cards, ranging from "Choosing and Using Credit Cards" to "Avoiding Credit and Charge Card Fraud."