Almost one in four Australians gets their first credit card in their late teens, according to a recent study by comparison website Finder.
The survey of just over 2000 people found about 16 per cent of respondents got their first credit card at 18, and another 6 per cent signed on the dotted line at 19.
However what is seen by many as a rite of passage can actually turn into a recipe for disaster, as Dr Adrian Raftery, a senior lecturer in financial planning and superannuation at Deakin University, found.
Think before you leap
“When I was 18 my dad actually convinced me to get a credit card and said it would be good for my credit card rating. But there was nothing further from the truth,” says Dr Raftery.
“You’re chasing your tail more or less by getting into a credit card cycle,” he says. “Once you’re in that credit card cycle, that rut, it’s very hard to get by without that credit card.”
While credit card limits can be on the lower side for teenagers, Dr Raftery warns that you should be very wary of increasing your limit just because the bank offers it.
“Your debt might be zero, but if your credit card limit is $3000, it has an impact on how much you can potentially borrow from the banks.”
Dr Raftery says rather than reaching for the ‘plastic fantastic’, young people would be better learning the basics of budgeting, and preparing well for unusual spikes in expenses – for example at car registration time or Christmas.
Nonetheless by the age of 25, 55 per cent of the survey respondents had credit cards, rising to more than 80 per cent by 30.
“About a quarter of a million credit cards are in the hands of Aussie teenagers right now,” says Finder spokeswoman Bessie Hassan. “Often it’s a decision that can have a lifelong impact.”
It’s pretty easy to start flashing the plastic in the same year you get your P plates. But experts warn it’s even easier for small debts to spin out of control, which can come back to haunt you later in life.
Justine Davies, editor-in-chief at financial data firm Canstar, says getting a credit card should not be seen as an automatic rite of passage.
Used properly, credit cards are your friend
“Credit cards can be a really useful cash flow tool, but you do need to use them correctly,” says Ms Davies.
“The danger for teenagers is that they might have very little financial knowledge and end up getting trapped in a debt spiral that sucks up a hefty amount of their first salary.”
She says many young people are earning an income for the first time, and might also be thinking about buying a car and moving out of home. Suddenly there are all sorts of bills coming in, and Ms Davies says it can be tempting to whack them on the card.
“Add to that the fact that a lot of young people are working casual or contract and so don’t have a guaranteed cash flow and you have a recipe for financial stress.”
Of course, there are some potential benefits to getting a credit card at the minimum legal age of 18. Ms Hassan says if handled well, a credit card can potentially improve your credit card rating. It could also offer access to funds in an emergency, and perks such as rewards points.
Suzan Campbell, senior manager of financial literacy at ASIC, says it’s important for first-time credit card holders to shop around and compare offers before signing anything.
“You should make sure you read the fine print and understand the fees and charges as you’re liable for all transactions.”
Manage your spending or you’ll have to face the music
She says young people, like anyone, need to keep track of their spending and stay within their limit. Ideally, you should pay the full balance on time to avoid extra interest and late payment fees.
“It’s best to avoid cash advances as they attract higher interest. If you can only make the minimum monthly repayment you should pay off more when you can to avoid additional charges,” says Ms Campbell.
If you think popping a grand or two on the plastic indefinitely is no big deal, ASIC’s Money Smart credit card calculator might provide a dose of reality.
For example, if you owe $1500 at an interest rate of 18 per cent, and only make the minimum monthly repayments, you’ll end up paying a total of $3776. And you’ll be making those repayments for 14 years and two months.