Financial Advice for Teens, From Teens (and Most Teens Really Need It)

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Teen financial adviceTalk about teen angst. Just in case you thought worries about money were solely the domain of adults, you can go ahead and put that assumption to rest.

Last year, Charles Schwab conducted a study asking teens about their perspective on money and the importance of properly managing it. Here are some of the results:

  • 93% of teens said their family was affected by the recession.
  • 75% said learning more about money management is a top priority for them.
  • 59% think that they will do better financially than their parents.

Even more interestingly, 77% considered themselves financially savvy, yet only 31% reported knowing how credit card interest and fees work -- or even what a credit score is.

Good Luck Out There, Kiddos! You'll Need It

While the recession has encouraged parents to talk about the importance of money management with their kids, those conversations aren't adequate preparation for the real world.

Most teens are still entering life after high school without the knowledge necessary to properly manage their finances. It's no wonder: In 2011, only 20 states required that personal finance be taught to students in some form -- and not even necessarily through a dedicated personal finance class.

The results of the most recent National Financial Capability Challenge aren't any more encouraging.

The Challenge tests teens' financial knowledge about everything from earning and saving money to taxes and insurance. The national average for 2012 was only 69% -- barely passing on most grading scales.


A Little Knowledge Can Be a Big Advantage

We caught up with three students who did exceptionally well on the Challenge and asked them where they got their money smarts.

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These three students all had important resources to thank for their financial know-how: parents who taught them the importance of money management at a young age and continued through their lives, and the opportunity to take a personal finance class at their high school in Mansfield, Mass.

Max Kinney, 17, and Chris Nugent, 18, both received perfect scores on the National Financial Capability Challenge, and Carlos Gomez, 18, was awarded a scholarship for also being a top scorer.

We asked them to share their top money management tips for fellow teens, and here's the advice they gave:

1. Find a way to save, no matter how small. Max says he first started saving when he was 7 because he wanted a video game console. The savings habit stuck, and he's continued saving since then, dedicating the past few years to saving for college. "Teenagers may not have a regular paycheck," he says, "but they do receive money from gifts and odd jobs. They need to always save some of that money every time they get some."

No surprise, all three of the financial teen gurus cited savings as something that should be a top priority for their peers. Whether it's a little or a lot, putting money in a fee-free savings account that offers interest is a smart way to grow your money.

2. Stay away from credit cards. Carlos wants to give his peers a heads-up about the dark side of using credit cards: "Be careful of credit cards, because they are a good thing if you know how to use them wisely, but they can lead you into a spending spree, and into debt."

Financial Advice for Teens, From Teens (and Most Teens Really Need It)

Credit card sign-on bonuses are certainly enticing, but you shouldn't be signing up for every card that's offering some cash back. This is because each application and subsequent credit pull will generate a hard inquiry that will appear on your creditreport. (Credit pulls that aren't used to decide whether you are actually getting a loan – for instance, one conducted by a landlord or by a bank when you are looking to get a checking account – are considered soft inquiries and will have no impact on your score.)

Each hard credit card inquiry will cost your score between three and five points and stays on your report for two years, though they only negatively impact your score for about half the time they appear.

One missed payment may seem innocuous enough, but in reality a single delinquency can cost a previously stellar credit score to fall more than 100 points. The good news: As long as the missed payment doesn't lead to additional woes, your score will start to rebound relatively quickly and it can get back to good standing in about 12 months following the delinquency.

(Those who already had poor to mediocre credit prior to the new missed payment will experience less of an initial ding, but their scores won't bounce back until well past the 12-month mark.)

To avoid taking the big hit, consumers can try calling creditors to ask for a good will deletion. They are more apt to oblige if the late payment was truly atypical behavior.

You should think twice before officially closing that credit card you opened back in college, especially if you're getting ready to apply for a new line of credit. Closing an old account can have a negative impact on yourcreditscore since it can lower your credit-to-debt utilization ratio, which is essentially how much credit you have at your disposal versus how much credit you are actually using.

According to FICO, it can also cost you points you might have been netting by having an ideal number of credit cards in your wallet.

The exact effect this has on your score will vary, depending on the rest of yourcredit profile, but the advice is consistent.

"If there is no annual fee, just charge something small every now and then," says Adrian Nazari, CEO of Credit Sesame. This will keep the issuer from deciding to close the account for you.

As MainStreet has previously reported, it's never a good idea to bump up against your overall creditlimit because your credit utilization ratio will appear sky-high. However, according to Chris Mettler, founder of CompareCards.com, maxing out a single card can negatively influence your credit score as well. (Again, the exact impact would depend on the rest of your creditprofile.) As such, if you do have a particular card that's bumping up against its limit, you'll want to pay that down as soon as possible.

"You don't want your balance due to be over 33% of the availablecredit line," Mettler says.

Credit card issuers typically only report two things to creditbureaus each month: whether you're up-to-date on all your payments and what your balance at the time is. As such, running up big purchases right before your statement closes – and the issuer reports the information – can negatively impact your credit-to-debt utilization ratio and subsequent score, regardless of whether you go on to pay off that balance on time or not.

"The trick is to make sure your balance is low before it is reported," Nazari says. This is why it can be a good idea to pay off purchases as you make them or prior to the end date of your billing cycle.

Even if you're not particularly credit active, it's a good idea to take advantage of the free annual credit report the Fair Credit Reporting Act entitles you to, if only to scour it for incorrectly attributed delinquencies, accounts or inaccurate balances, which can all do varying amounts of damage to your score. This is because errors on credit reports are all too common. As MainStreet has previously reported, about 30% to 40% of all credit reports have some type of error on them, some of which can unfortunately be difficult (and time-consuming) to remove.

You may think that you don't owe that unpaid medical bill that keeps getting sent to your house, but your score is still in jeopardy if you decide not to pay it. Many places that don't lend money, like a hospital or cable company, will send their unpaid bills to a collections agency after a certain amount of time and they will report you to the credit bureaus. Similar to a missed mortgage, credit card or auto loan payment, this delinquency can cost good scores 100 points or more.

"Whether you are right or wrong, [the bill] will negatively impact your score," Mettler says. As such, consumers may want to shore up the bill in an effort to spare their score or dispute the bill through proper channels to get it eradicated.

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The danger of debt is something that Chris learned about at an early age: "In middle school I read an article which stated that if a young couple spent $5,000 on a credit card and if that couple only paid the minimum payment each month, it would take over 30 years and over $30,000 to pay off that balance."

3. Budget. Chris advises his fellow teens to become more aware of how much they spend and on what: "Only through tracking expenses and budgeting will you fully be able to understand where your money is going," he says. The only way to figure out how to save more is to see exactly where your money goes, he says.

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