Most teenagers can’t wait for the time when they will be able to drive and have their own credit card. Both are symbols of freedom and independence. Unfortunately, just as driving is inherently dangerous, owning a credit card holds certain risks.
All people and especially children should be educated how to properly treat credit cards. In many cases credit cards will not bring the desired freedom but enslave the person using them. There is this notion that the line of credit is the amount that can be spend. People sometimes will even brag about their available line of credit. In reality, they can’t even pay the much smaller amount charged on their credit cards.
Many credit advisors will urge people to pay at least their minimal monthly payment to avoid extreme fines. This is a very ill-advice. One should completely ignore the minimum payment and pay the whole bill in full. The fees are something to be avoided but the accrued interest is just as important to avoid. Most credit cards have exuberant interest rates (15% on average but quite often around 20%) and the interest alone will skyrocket in a very short time.
If for example a person spends on his or her credit card $1000 and has %20 interest rate, it will take them 117 months (almost 10 years) to pay this amount if only the required minimum is being paid each month (staring at $26.67 and decreasing over time). In fact, the amount being paid to the credit card company will be more that doubled ($1000 + $1056 in interest).
Free online Bankrate Credit Card Interest Calculator
The average credit card debt among low- and middle-income households in the US was about $7,145 in 2012 . If the goal is to make the minimum payment only and wait for better times to pay in full, those better times will never come. Most likely this is a recipe for bankruptcy and life in ruins.
So what a person should do with their first credit card? There is no need to burn the evil plastic. Instead, one should limit the ways the credit card is used. The goal is to maximize the tracking of purchases and always be aware of the amount on the credit card. This amount should be no more than what the person can afford at the moment if they were using cash instead.
The important message to take is the affordability of a particular purchase AT THE MOMENT. It is a mistake to count on future income for current spending. It is better to wait a few more days or months to buy the new clothes or refrigerator if it is not an emergency. When people live within their means they are much more likely to succeed in life. Living on credit is one of the worst choices a person can make.
Credit cards should be used only because they provide convenient way of payment. They should not be regarded as free money; they provide free money only to the creditors. Finally, the best credit card has no brand name on it. It is the card with the bill always paid in full.
1. THE PLASTIC SAFETY NET: 2012 http://www.demos.org/publication/plastic-safety-net