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As much as you try to reinforce to your teens that credit cards are an adult responsibility that should only be used with proper planning and budgeting, it’s hard to deny the magical aspect of using a plastic card to buy things you need or want without having to fork over cash at the time of purchase.
The concept that you will be paying for this later, and sometimes paying more if you cannot make monthly payments and incur high interest rates, can be a difficult concept to grasp for even seasoned credit card users. Make sure your teen knows what NOT to pay for with credit cards to ensure they don’t fall into a pit of debt as soon as they head off on their own after graduation. It’s easier than cataloguing the numerous items they can buy with credit, and will at least safeguard them from buying expensive items they will never be able to realistically afford.
Here are five items your teens should never pay for with a credit card:
Yes, a college education is important, if not a requirement for success these days. Trouble is, the cost of college tuition is perpetually on the rise and college students are still as broke as they always have been. Due to the exorbitant costs of education, most teens receive financial help either from their parents or through scholarships and loans. But if your teen is responsible for even a portion of their tuition, they should not use a credit card to pay the bill. Many schools will add a convenience fee (roughly 2-3%) for paying with a credit card. On top of that, the amounts are so large your teen wouldn’t be able to pay off the credit card before having to start paying interest on it. If your teen is having trouble paying tuition on time, talk to the school and find out about the types of low-interest student loans, grants or work-study programs that are available to offset the cost.
Not every auto dealer will accept credit card payment, but the ones that do will likely charge a transaction fee of 1-2%. When you’re buying an expensive item like a car, 1-2% can add up to several hundred dollars. Also, the chances your teen has a credit card with a high enough limit to handle the initial down payment on a car are slim. More than likely, your teen would max out their cards, negatively affecting their credit score. Instead, consider borrowing from a bank or credit union. Interest rates would be around 3-4%, compared to 15% rates your teens would endure on the average credit card. Another benefit of receiving an auto loan is adding it to your credit report, which helps the health of your credit score.
The cost of healthcare is not cheap and paying for it with a credit card will add high interest rates to the overall bill. Your teen could wind up digging an early debt hole that could affect their future finances if they go down this road. Contact a hospital’s financial department to help your teen set up a payment plan. This result in smaller or no interest charges and give them a clear road to paying off the balance completely.
If your teen needs to file taxes and ends up owing money to the IRS, they should not use a credit card even though it is an option. Like vehicles, taxes can end up being a large dollar amount and tax preparers will charge a convenience fee for using a credit card. The 2-3 percent fee could tack on a good amount of added money if the initial amount owed in taxes is high to begin with. Plus, interest rates on credit cards are other higher than what the IRS charges through its range of payment plans. Speak with the tax preparer to figure out the best way your teen can pay taxes or contact the IRS ahead of time to work out a payment plan.
So your teen is using their education to begin a business. Excellent! But they use a personal credit card to expense their venture to get it off the ground. Not so excellent. This tactic is risky because it generally takes a few years for business to become profitable. In that time, your teen will pay high interest rates on those costs, effectively negating any profit from the business. Small business loans are more suitable in these situations.