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How To Teach Teens The Importance Of Credit

How To Teach Teens The Importance Of Credit

Explain appropriate use of credit to your teenager to help him understand how building credit can help him develop financial security. When people have significant purchases to make, such as homes or vehicles, it difficult to save enough money to pay the entire purchase price up front. By approaching a financial institution to provide a part of the money, it becomes possible to make a large purchase. This agreement involves a specific period of time for the loan, specific payments and additional terms such as interest and default provisions. Financial institutions have specific guidelines and credit rating requirements for approving someone for financing.

Mention revolving credit with your teenager to impart this understanding. Explain that credit cards are an example of revolving credit, according to the Federal Reserve Bank of St. Louis. When a credit card company issues a consumer a credit card, the account has a specific credit limit for allowable credit spending on the card. If the consumer reaches the limit, no additional credit will be available with the account until the consumer pays the balance down. In return for the credit card company providing this credit limit, the company also charges the consumer interest on money borrowed. If a consumer repays the balance in full each month, the consumer can avoid exorbitant interest charges.

Step 5

Talk about responsible use of credit so your teenager understands this concept. It common for young people to receive numerous credit card offers, but using credit cards to amass high amounts of revolving debt can be extremely costly due to high interest rates. Even a nominal purchase can become much more expensive with resulting interest if the consumer doesn pay it off in a timely fashion, states the Clearpoint Credit Counseling Service. Help your child understand that using credit wisely should build credit. Paying purchases off each month can be a convenient way to make purchases. Carrying multiple balances month after month can be expensive and potentially risky to a consumer credit rating. It should not be used as a substitute for professional medical advice, diagnosis or treatment. LIVESTRONG is a registered trademark of the LIVESTRONG Foundation. Moreover, we do not select every advertiser or advertisement that appears on the web sitemany of the advertisements are served by third party advertising companies.