Give me some credit

"When I have credit I know how easy it is to buy things.” Nicoletta Loverso, 18

Once teens turn 18, they can vote, gamble and live on their own. But teens are not allowed to have credit cards without parental approval until they reach 21.

Some teens are ticked off that they still need mom and dad to give them access to credit. One is 17-year -old Jonah Rood of St. Louis Park.

Rood thinks he’s ready for a credit card, but the law doesn’t. Rood wants to get a credit card to establish a credit score so he can rent an apartment on his own, but he can’t get one unless his father co-signs. This is the situation for most American teens, thanks to a federal law called the Credit Card Accountability and Responsibility Disclosure Act (CARD).

CARD, passed by Congress and signed by President Obama in 2009, requires banks to issue credit cards to people under 21 only if a parent or guardian has co-signed the application and takes responsibility to pay off any unpaid debt. Other options for teens include proving they have enough money to pay off the debt themselves or have completed a certified financial education course.

Rood said he thinks the law doesn’t help kids and only make things more inconvenient.

“I think (CARD) just makes it difficult for kids aspiring to move out,” he said. “In a sense it makes you rely more on your parents, and if you’re trying to become independent it just makes it that much more difficult.”

Rood’s father, Randy Cleem, isn’t willing to co-sign for a card because he doesn’t think Rood is responsible enough.

“It’s not an age thing,” Cleem said. “He just needs to show a little more responsibility before he’s ready.”

Dangerous plastic

Berni Johnson-Clark, the media contact at Jump$tart Coalition, a nonprofit organization based in Washington that promotes financial literacy among teens, thinks the law protects teens and young adults.

“I do believe the current law is preventing young consumers from acquiring too much access to credit, which could lead too many into high debt loads early in life,” Johnson-Clark said. “I think another benefit of the law is the education that comes with credit cards to young consumers.”

Johnson-Clark thinks most high school students don’t know much about how credit works and that keeps them from using it wisely.

“Students understand credit means buying now and paying later, but they don’t understand how interest accrues, the long-term cost if you don’t pay the card off in full and the fine details around fees and such,” she said. ”They also don’t understand that having access to credit via a credit card can influence their purchasing decisions, leading some to overspend.”

One way to get in trouble with a credit card is by paying back only the minimum required each month. This can result in higher interest charges than if the borrower paid back more each month – or better still, paid off the entire balance.

According to Johnson-Clark, if someone charged $1,000 on a card with a 14 percent interest rate and paid only the $40 minimum each month, it would take them 110 months to pay off the $1,000 — plus $732.15 in interest charges.

Careful with credit

St. Paul Central High School student Nicoletta Loverso, 18, has a credit card on her parents’ account and is uncharacteristically careful with it, using it only for necessities like gas and food.

She’s exceptionally careful with money in general: She can spend a day at the mall and leave only ten dollars poorer, while her friends end up penniless after spending $80. Her self-control is unlike that of most teenagers, partly because she understands the dangers of credit.

“When I have credit I know how easy it is to buy things,” Loverso said. “I think less about money when using a credit card and feel like I could buy whatever I want.”

But even Loverso doesn’t understand details like interest rates, late fees and minimum payments. “I’m pretty ignorant on the subject of credit,” she said. “I think a lot of people are.”

Building your credit score without borrowing

Neither Loverso or Rood know exactly what a credit score is or how it is calculated, even though Rood wants a credit card so he can acquire a good score.

Johnson-Clark explains that a credit score is a three-digit number ranging from 300 to 900. It is used to help lenders decide if they should lend money to a person for everything from a mortgage to a car loan, and how much interest to charge. The average credit score in America is 678.

It is calculated with information from a person’s borrowing history: 35 percent of the score is determined by timeliness of payments, 30 percent by the amount of outstanding debt, 15 percent by the length of credit history, 10 percent how much new credit the person is seeking and 10 percent by the type of credit.

If a borrower’s credit score is above average, he/she will be charged a lower interest rate and have a better chance of getting loans. If the credit score is below average the opposite will happen.

Johnson-Clark said the best ways for teens to build a good credit history are to have checking and savings accounts, keep a job for more than one year and think hard about why they need credit.

“Post high school, teenagers need to ask themselves why they need to access credit,” she said. “I think in our credit-driven way of living most people believe they need a credit card, but that’s not always true.”

Debit cards and prepaid VISA cards (see sidebar) are ways to have the convenience of plastic without the risk of credit cards because the cash to pay them is already in the bank.

Rood still hopes to convince his father to co-sign so he can get a card.

“I think it’s just my age holding me back,” Rood said. “My dad isn’t very supportive, but if I show him I’m responsible and can accomplish things maybe he can help me.”