Now that credit card interest rates are higher than ever, with rates averaging 21% – 28%, it’s a good time to make sure that young adults and older teens in your life get some basic guidance and tips that can make a huge difference in their future financial success. Establishing and improving their credit score while avoiding high interest rates can translate to saving lots of money when they are renting their first apartment or looking to buy a car, home, or even insurance. Make sure they understand the three factors that determine whether having a credit card helps or hurts their credit score:
- Do they pay their bills on time? This is vitally important. Late payments can really downgrade credit scores.
- Are they using less than 30% of the available credit limit? It’s not good for credit scores if you run up a balance. But it’s perfectly fine (and smart) to aim for using way less than 30% of the available credit limit.
- How long has the account been open? Longer is better, so don’t open and close credit card accounts to chase the best sign-up deals.
One way to establish or improve their credit score without running up a big credit card balance or paying any interest: Open a credit card, use it once a month for their first tank of gas, then when they get the bill, pay it off in full promptly. Don’t use it for any other purchases (a lot of young folks prefer debit cards anyway). Think of a credit card as a tool to establish or improve your credit score, not as a tool to purchase things.