If used correctly, a credit card can teach teenagers about managing their personal finances, but the incorrect use of these cards is, unfortunately, on the rise. Teenagers need to understand credit card bills have to be paid on time or additional charges will be levied.
These charges can escalate very quickly and during 1999, more than 150, 000 teenagers in America were facing bankruptcy. By the year 2000, one third of undergraduates were carrying upwards of four credit cards.
Advantages of Credit Cards
Teenagers are eligible to apply for a credit card at the age of eighteen. An important plus point for carrying one is that it can be used in an emergency situation.
Credit cards can also be used to teach teenagers about financial matters, which is best achieved when parents are still supporting them and can intervene if required.
It is best to limit the amount of credit available to a teenager to $1,000 and to ensure that the youngster receives the bills and pays them on time.
Teenagers should be shown the amount of interest that they will be required to pay if they choose to carry a balance. This interest increases over time and substantially affects the costs involved, which must also be explained to the teenager.
It is important to show teenagers how the interest that they incur will grow exponentially and that this can only be prevented if the balance is brought down to a level that they can manage.
Credit cards can teach teenagers the dangers of accepting money offers that incur charges that they may not be in a position to pay.
Disadvantages of Credit Cards
There are, unfortunately, more disadvantages than advantages to giving credit cards to teenagers. Prime among these is that they can easily become accustomed to overextending the amount of money that is available to them.
Teenagers also do not typically have a sense of the money they spend and do not always appreciate the value of a dollar. By carrying a credit card, teenagers have easy access to money that they have not actually earned.
When money is easily available in this way, teenagers may not learn how to budget or how to save up for an item that they want. Credit cards give teenagers naïve expectations regarding the things they are in a financial position to purchase.
A real danger to giving credit cards to teenagers is that they can incur bills that they are not easily able to re-pay. By purchasing goods with a credit card, that would normally fall outside of their budget, teenagers run the risk of misunderstanding how best to use a credit facility.
With these pros and cons in mind, credit cards should be treated like a safety net for emergency situations only. Teenagers should always be taught not to spend money that they do not actually have.
Author Bio: This guest post was provided by Karl Thompson from MoneySupermarket.com. The advantages and disadvantages of giving credit cards to teenagers are further discussed at moneysupermarket.com/credit-cards/.