Tag Archives: interest

2.16-blog

5 Things to Avoid Buying with a Credit Card

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:

  1. Tuition: 

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.

  1. Vehicle:

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.

  1. Medical bills:

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.

  1. Taxes:

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.

  1. Business startup:

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.

stockmarket

Stock Market 101: Teaching Teens about Wall Street

You don’t need to be a financial expert to give your teen a solid foundation in the importance of investing. Wall Street can be intimidating, but teaching your kid the value of risk and reward can propel his or her financial future.

Investing a small amount during the teen years can yield great returns by the time your teen is an adult, potentially helping them pay off any nagging student loan debt or make a down payment on a home.

Of course, investing even the smallest amount in the market is easier said than done. It’s tricky to navigate the landscape and there is no guarantee of success. But look at it this way: you could plop down $5 a day on a fancy latte or save that money and in one month invest $150 in the stock market.

Not ready to take the plunge? No problem. Use this time to brush up on the stock market with your teen. Check out this resource and together you and your teen can make a joint decision. The activity could serve as a nice time to bond over the shared interest!

Stocks vs. Bonds

Before talking about investment strategies and creating a portfolio, be sure your teen understands the basics. Teach them what stocks and bonds are, emphasizing the differences between them and their long-term potential. As a general rule of thumb, stocks are riskier but have the potential for higher rewards; bonds are safer but will result in a smaller return.

When having this discussion, be sure not to scare your teen away from investing in stocks. Present both options as pragmatically as possible, letting your teen weigh the pros and cons, developing opinions for themselves.

Once your teen has mastered the facts, take it up a notch and discuss the idea of strategy and portfolio development. Be sure to touch on ideas like diversification, but also keep it as practical as possible. What you’re most familiar with or encouraged by at the moment, like retirement portfolios for example, is not what’s going to pique your teen’s interest.

When you have the conversation, pick out a few stocks that relate to companies your teen feels connected to. Tech companies that own apps your teen uses, restaurant chains and clothing retailers are great starts. Look over their stock performance with your teen, showing them how market fluctuations impact stocks.

Practice Makes Perfect

Stock market conversations can be difficult for teens (and even adults) to grasp since much of it is theoretical. Teens will better understand the stock market by participating in it themselves.

Take advantage of free resources in your community and online that make investing fun (and easy to learn!) High schools often offer extra-curricular investment clubs where students create hypothetical portfolios and compete against one another for who can generate the most profit.

If your teen isn’t the competitive type, check out online investing games; these provide a fun way to teach teens investment strategies without the real-world risks.

If your teen’s test-drives have been successful, and they want to take things a step further, consider helping to develop an investment strategy using money from summer jobs and allowances. Help your teen identify what percentage of money to spend, save and invest. When they have made a decision, you can invest it for them via a custodial account that they can access at age 18 or 21 (regulations vary by state.)

Investing is one key aspect for financial health, and requires an unparalleled commitment to letting your original investment ride trend waves. When discussing the stock market with your teen, make it part of a larger conversation about smart financial management.