Teens and credit: what not to do

Ah, freedom! The world opens up to us at the age of 18. We can leave the nest, vote and stay out as late as we want. Yet, our parents' words still ring true: with privilege comes responsibility. At 18, American teens can assume control of their legal and financial futures. Yet they need to understand that slip-ups can affect their futures for years to come.

"Once teens turn 18, they have their first shot at establishing a positive credit history," said Mike Sullivan, director of education for Take Charge America, a national not-for-profit credit counseling agency. "If they end up abusing or misusing the system, their actions can prevent them from qualifying for additional lines of credit down the road."

According to the most recent statistics from Nellie Mae, in 2004 college students reported freshman year as the most prevalent time for obtaining credit cards, with 56 percent having obtained their first card at age 18.

"Our homes, cars and other valuables are all rooted in our credit history. The younger you start, the sooner you'll be able to achieve financial independence," Sullivan said. "Without a consistent, positive track record, teens and 20-somethings won't be able to rent an apartment, buy a car or apply for a loan without their parents' signature."

So, what does it take to build a positive credit history?

Here is what you shouldn't do:

Don't go on a spending spree

Just because you have the credit, doesn't mean you should spend it all. Your first credit card should have a low limit, such as $100 or $500. This will help prevent large impulse buys. If you know you're an impulse shopper, you can further restrict temptation by applying for a store or gas card, as opposed to a general bank credit card that can be used at almost any location.

Don't test your credit limits

Make a small purchase to kick off your credit history and then make consistent payments. You don't want to be caught in an emergency situation with a maxed out credit card. If you withdraw over your credit limit, you will be faced with exorbitant fees. Plus, the overdraw shows up on your credit report, and that could prevent you from receiving other forms of credit at reasonable interest rates in the future.

Don't share your credit information

No one should have access to your credit information, including close friends. Don't leave your monthly bill in plain sight, nor ask anyone to hold onto your credit card. This could leave you susceptible to fraud and identity theft.

Don't ignore the fine print

You need to know exactly what you are getting into before you sign the contract. Financial jargon can be confusing, so ask questions if you don't understand the terminology. You will be held accountable for all information listed in the fine print, whether you understand it or not. Be cognizant of over-limit and missing-payment fees. How much could these fees potentially cost you? What happens if you miss a payment? Do you have an introductory fixed rate? If so, for how long? Once you have established a line of credit, be sure to examine each monthly bill and take note of the minimum payment amount, the total balance and the interest rate. Has anything changed? Is there an unauthorized purchase? Call the credit card company immediately if you notice inconsistencies.

Don't be afraid to ask for help

It's normal to encounter bumps along the road to establishing credit. Have an open dialogue with your parents and ask them to go over your credit card bill if you are confused. You can also seek the advice of a credit counselor. Visit www.bbb.org to locate a reputable agency.