Kat Delgado, Kirkwood Senior Vice President of Programs at Junior Achievement of Southern California, recently sat down with moneygeek where she provided expert insight into how student cards and credit knowledge can prepare youth for financial success. (originally published through moneygeek at moneygeek.com.
Many students are not educated on credit card use, managing spending and debt. What tips do you have for new credit card holders or parents looking to teach their students how to properly use a credit card?
I would say that students and parents need to understand that a credit card is borrowed money. Second, the use of a credit card comes with an interest rate. The rate is the fee for borrowing the money.
Before getting and using a credit card, students should have income — they should have a means by which they can pay back the borrowed money. Either the parent is committed to paying back the credit card for the student, or the student needs to have a job or source of income to make the payments.
Have a budget — a plan for how you will spend your money every month. A budget should allocate every dollar that comes in. Put it into a budget category — food, housing or savings. If you are using your credit card for a large purchase that you have not saved or budgeted for, then you should be creating a payment plan in your budget that is more than the minimum monthly amount owed.
Also, understand what makes up a credit score — a FICO credit score considers five categories of credit data: new credit (10%), payment history (35%), types of credit used (10%), length of credit history (15%), and amounts owed (30%). A score ranges from 300–599 (poor) up to 720–850 (very good to excellent). Your credit score determines your “trustworthiness” with a bank, and your score is a measure of your likelihood of paying back the borrowed money on time.
It is always important to pay your balances in full. If you are paying only the minimum due, you are paying more than the original purchase price. Also, note that credit cards have a grace period of up to 25 days for late payments. After that, you will be paying a late fee, which means you’ll be paying more than the original purchase price and need to adjust your budget accordingly.
Some credit cards will charge you an annual fee which allows you to use the card. If you choose a card that is not free to use, be sure to budget the annual cost into your budget plan.
If you decide to use a credit card for everyday purchases, you should not be using your debit (bank savings or checking account) card at the same time.
What are the most important factors a student should consider when comparing credit cards?
Definitely consider the interest rate, often referred to as the Annual Percentage Rate (APR), as well as any annual fees. Understand the grace periods and look for any additional fees for simply having the card.
Understand your credit score and research the minimum score required by the credit card company for approval.
For a comprehensive list of card options and answers to frequently asked questions about them, feel free to view Money Geek’s full brief on the subject below: