Many high school students are primarily supported financially by their parents, and some of these students struggle to understand how to manage money later.
Make sure you understand these financial basics to avoid future money problems.
Credit is not the same as debit
When you swipe a card at checkout or make an online purchase, you may be able to choose to use credit or debit. The choice depends on the types of accounts you have and how you intend to use your money.
- A debit account allows you to use money already set aside in a checking, savings or other account. You access this cash using a debit card, checks or electronic transfers.
- A credit account allows you to use money you don't already have to make a purchase and then pay it back later. Usually, you will be charged interest or other fees to access money on credit. Credit accounts include credit cards, student loans and other consumer loans like car loans.
- Some financial institutions allow you to use the same card for both a debit account (like a checking or savings account) and a credit account (like a credit card). Keep your debit and credit usage straight to avoid problems.
You should know how much money you have
One of the factors in deciding to use credit or debit is whether you already have enough money to pay for the purchase without using credit.
- You can usually check your balance online or by calling your financial institution at any time.
- Your current balance doesn't include pending transactions—purchases you've already made that haven't been paid out of your account yet. Remember that many transactions only occur during business hours on business days and that the transfer of money may itself take time.
- Keep track of your spending and compare purchases to transactions recorded on your account to understand your current balance.
- Balancing your account regularly or keeping a running total is also a good practice. You can manually balance an account by subtracting money spent from the balance and adding any money you've put into your account. Online tools and free apps are also available to help you.
Overdrawing a debit account has consequences
You may pay consequences for debiting more money than you have. Sometimes, an overdraft occurs even when you make a deposit that you think will cover pending transactions due to the timing when the deposit and withdrawals are applied by the financial institution.
- Overdrawing a debit account, or spending more money than you have available, may incur extra fees.
- Each financial institution has its own overdraft fees and rules. Make sure you understand the number of transactions that can be assessed an overdraft fee in a single day as well as any consequences for not repaying the overdrawn amount and fees within a certain timeframe.
- Many financial institutions allow you to set up overdraft protection, which will automatically cover payments beyond your account balance by drawing from another account, like a savings account, or by extending a line of credit to cover the withdrawal. Be careful with this type of protection: you may end up paying more in fees than if your purchase was simply declined, and it can make fraud harder to detect.
- If you overdraw frequently or too many times within a set period, you may face other consequences, such as having automatic electronic transfers like a recurring payment be canceled. This can affect your payments to service providers and result in additional late and finance fees.
Credit cards have their own set of features
If you have a credit card, you should understand its features and the terms.
- Based on your creditworthiness, or how well you've handled money in the past, your card issuer may set a limit on how much you can put on the card. Be careful spending up to the limit, however, as you may pay more in interest and fees, and a pattern of doing so may hurt your credit score.
- In general, you are able to charge larger purchases on a credit card and make smaller monthly payments to repay the debt. This makes credit cards good for large, infrequent expenses and for emergencies you may not be able to cover out of available cash.
- You are charged fees and interest for using the card and carrying a balance, however. These charges together make up the annual percentage rate, or APR. Carrying a large balance and making only the minimum payment over a long period of time may end up costing you several times the original purchase price.
- One way to avoid paying high interest is to pay off the balance each month. You can set up automatic payments from a checking or savings account, or make manual payments online or by check.
You should be interested in interest
Interest is extra money paid for the use of someone else's money. This can work for or against you.
- Many savings, checking and other accounts through a traditional financial institution like a bank or credit union offer interest that is paid to you. Your bank, for example, may offer interest on a savings account as long as you keep a certain minimum balance.
- Over time, interest builds and is added to the account balance. This amount then begins to earn interest as well. The power of compound interest can make a drastic difference in savings and investments over time.
- You are also charged interest when you use someone else's money, such as through a credit account or by taking out a loan. Rates and accrual method, or the way interest is assessed, vary by product and by creditor or lender.
- Just as compound interest helps you save over time, capitalized interest added to debt can hurt you over time. Unpaid interest may be added to the principal balance of the debt, and you will begin to be assessed interest on that amount as well, significantly increasing the amount to be repaid.
- Regardless of the type of account, you should read the fine print concerning interest and be sure you understand how you will earn or pay interest to make smart financial decisions.
Credit isn't just for homework
As you take on debt, open accounts and pay bills, you build a credit history. Consumer reporting agencies use this history to assign you credit scores, which in turn are reviewed by lenders when you apply for a loan or credit.
- Several factors, including how long you've held an account, number of late payments, the types of accounts you have and total debt, affect your credit history.
- Poor financial decisions can have a long-lasting effect on your credit, making it more difficult to obtain a loan or credit later in life. It may take several years to improve a credit score.
- As a student, it can be difficult to build a credit history, especially before the age of 18. You can get started by becoming an authorized user on a parent's account.
- If you pay any bills in your name, such as for a student apartment once you're in college, ensure you pay your bills on time and in full.
- You are entitled to a free credit report once a year from each of the three main national consumer reporting agencies. You should monitor your credit for fraud and to ensure you continue to build good credit.
There's a right way to handle payments
When you are in charge of managing your own purchases and income, be sure to handle them appropriately.
- Know how to write out a check to pay someone else. Although electronic payments are more common than ever, you may need to know how to fill out and sign a check to pay a landlord or make a purchase from a vendor. Talk to your parents or your financial institution, or do an online search, for a demonstration.
- Also know how to cash or deposit a check you receive in payment. Your financial institution may offer a few ways to do this, including by taking a picture or scanning the check with a phone app or ATM. Understand the requirements for endorsing, or signing the back of, the check and for receiving the payment in cash or into your account.
- When you receive a new payment card, such as a debit or credit card, you will need to register or authorize it with the issuer and sign it. The issuer may also require you to respond to a text or email to approve a pending purchase outside your typical spending habits.
- You will be responsible for inserting or swiping your own payment card when you make many purchases. Be sure you understand when to select debit or credit and if you will need a separate PIN to confirm a purchase.
- Know that some vendors, such as some fuel stations, hotels and restaurants, will run a temporary hold on your card until your service or transaction is complete. It's especially important to be aware of this if you have limited funds or are near your credit limit.
- Understand how payment services such as PayPal or Venmo work and how fees are charged if you are using these services to make payments or transfer money.
