The world of credit cards can be a big, wide, scary one for teenagers – and for their parents. Speaking with your children about how to save money, use a credit card responsibly, and pay off debt can help alleviate some of that fear. These do’s and don’ts can navigate the course and help assure that your teens get off on the right money management foot.
- start early
- help them understand the basics
- talk with teens about how you make financial decisions
- use your credit card as an example
- explain when it’s best to use a credit card instead of cash (or a debit card)
- be a bad example
- use your credit card all the time
- refrain from using credit
- forget to explain the impact of credit card use on credit profiles and scores
- automatically get a credit card for a teen in college
If you’re reading this and have young children, start teaching them how to handle money responsibility from an early age. Teens and young adults who have good spending habits to fall back on will be much more likely to use a credit card responsibly.
Make sure your teen understands basic money management before you bring up credit cards. Talk about your household budget. Have them practice creating a budget of their own. Consider delegating a household task — maintaining the lawn mower or preparing meals — to teens, with a budget. As part of the household, they then are responsible for managing the budget and paying for necessary items or repairs. Help your teen open checking and savings accounts. Some banks let teens manage their own accounts, and let parents set limits on withdrawals. Many credit unions have teen accounts, too.
Sharing the decision-making process of choosing whether to take a week's vacation or buy a plasma television — or forego both to pay the orthodontist — can give kids a clearer picture of how to make smart money choices of their own.
Explain how you pay for things, what you do when your bill comes each month, and how much time you have to pay off your purchases. Go through each area of the statement with your teen so they start to become familiar with concepts like APR, fees, interest and due date. Explain that a credit card is not “free money.” It simply lets you delay payment by borrowing money from your future self.
For example, it can be worth using a credit card when making a significant purchase, like electronics, where you might need to take advantage of the extended warranty that sometimes is offered with a card. A credit card offers greater protection against fraud with online purchases than does a debit card. For travel- and transportation-related expenses (rental car/hotel reservations, gas purchases), credit cards are convenient, and often necessary to hold reservations. They also provide an extra measure of protection when traveling in case a card is stolen.
Don’t charge anything you can’t afford to pay back in full and on time, at the end of each billing cycle. Live within a budget, pay bills on time, and keep track of your charges.
Cash, checks, and debit cards can be more effective to assure you spend within your means. Let your teen see what purchases you make with a credit card (and explain why) and which you don’t.
Some parents, worried that teens will get the wrong idea about credit cards, stop using their cards entirely. Kids need to understand that credit can help build credit profiles and scores, can be a helpful convenience, and help with certain purchases (see No. 5 above).
Responsible credit card use can positively impact credit profiles and scores, which affect an individual’s ability to borrow money and the interest rate he or she pays. Credit scores also can affect the ability to rent an apartment, lease a car or even get a job. Help older teens access their credit reports. Everyone can access credit reports once each year for free at Annualcreditreport.com.
Credit card lenders can no longer solicit students in person and on campus to open credit cards. Credit card companies also are no longer permitted to issue cards to applicants under age 21 without an adult co-signer or proof of adequate income. Many experts suggest college students wait until age 21 and that parents do NOT co-sign for a card. While the decision to get a credit card is an individual one for each family, a debit card can be a viable alternative for college students so that balances cannot accumulate.
Like every other area of life, kids will pick up financial habits from their parents. If you argue with your spouse about money, use your credit card with abandon, or don’t have a regular system in place for paying bills, you’ll be teaching this kind of money management to kids. Instead, figure out – and talk about – ways to live within your means and spend (with or without a credit card) responsibly.