Lessons on smart credit card usage
Don't use a credit card on any purchase that will be consumed by the time the statement arrives.
That's long been one of my standard rules when advising teens and 20-somethings about using plastic responsibly. Don't swipe the credit card to pay for a pizza, an iced latte or any other food or beverage.
Not so fast, says Jeff Doss, a reader from Connecticut.
Doss wrote: “I understand not continually swiping a card for $5 lattes and snacks. But how is there a difference in buying $300 worth of clothes in a month on a credit card or groceries and gasoline as long as it is paid off by the end of the month?”
Good question. I ran his comment by three credit card experts and they offered different takes.
“It's not the specific purchases that are important,” said Robert Manning, author of “Credit Card Nation.”
Rather, Manning said, the key to using credit cards responsibly is “whether the users have a budget and strive to adhere to it.”
OK, but if they don't?
“Then they will not cognitively monitor their credit card spending,” Manning said. That will lead to overspending and monthly credit card balances that revolve over and over.
Bill Dwight, chief executive of the financial services website FamZoo.com, recommends a “hybrid approach” for teens who are learning the ropes about managing their money: a prepaid debit card to reinforce budgeting and a credit card to cover emergencies and certain expenses that you've agreed to sign off on.
If you go this route, Dwight suggests selecting a prepaid debit card — with low or no fees or hidden overdraft fees — and loading it with enough money to cover all the varied, discretionary expenses incurred over a week or month, such as fast food, snacks, movie tickets and personal items.
“The prepaid card is a very simple tool for staying on budget,” Dwight said.
And technology can help, he added, if the card “has real-time alerts that report the remaining balance after each purchase.”
It also makes sense to hold a credit card to build up a good credit history, but Dwight said there are caveats: “If you restrict its usage to a known recurring expense or a very narrow category of spending, like gas, you'll minimize the chance of your teen failing to make a full payment at the end of each month. And if your teen ever needs to use the credit card to cover an emergency, require an immediate payment to cover that expense instead of waiting until the end of the month.”
Gerri Detweiler, who operates Ultimate Credit Solutions in Sarasota, Fla., suggests a simpler approach: Only use the credit card for an emergency.
“And if you can eat it, drink it or wear it, it's not an emergency,” she said.
Still, Detweiler noted, credit cards can be a great tool for learning to budget, and for many kids learning to budget includes spending money on gas and clothing.
My take: Learning to use a credit card responsibly takes a lot of work, with sometimes gut-wrenching results. Make no mistake about that, given that many consumers are dragging around way more debt these days than they can afford.
As for my rule about handling plastic responsibly, it's merely a guideline. Follow it, bend it or toss it.
Ultimately, I think the key for young credit card users is to get into the habit of paying the monthly bill in full and to not use plastic as an extension of their income.
Those are some suggestions for kids and credit cards. What are yours?
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