How To Talk to Your Teen About Debt

Start the Conversation: What Your Teen Needs To Know About Debt

father and daughter sitting at kitchen counter discussing finances in front of computer
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We teach our children a lot of important life skills—like how to ride a bike, behave at the dinner table, and navigate tricky social situations. Another important life lesson all parents should teach their kids is how to build good financial habits. 

While money can be challenging to talk about, it’s key to encourage transparency when discussing financial topics with children. As teenagers get older, it’s important they understand the good and the bad that comes along with managing money. Let’s examine how to go about talking to your teen about money, specifically regarding what you need to share with them about having and managing debt

Key Takeaways

  • It’s important to have honest conversations with your children about money from an early age so they understand financial basics before they head out into the world.
  • It’s especially important to teach teenagers about how credit cards and debt work, as those are likely two aspects of money they will have to deal with in the future.
  • Before they head off to college, you’ll want to walk your children through how student loans work and what taking on student loan debt truly means. 

Talking About Finances With the Family

Having regular money conversations with your teens can make the subject of finances generally less overwhelming. 

According to Elizabeth Hicks, child psychologist and cofounder of Parenting Nerd, a blog dedicated to raising children, your teens can benefit greatly from having conversations about money. 

“Teaching children about money equips them with a knowledge of how to effectively manage their own expenses in the future,” Hicks said. “Children who are good at money calculations and concepts often tend to have parents who give them responsibility at an early age to save and spend. Therefore, children grow up more responsible and wary of spending.”

Instead of delivering dry lectures to your children, Hicks recommends incorporating practices into your daily life that will help them understand important financial topics. 

For example, you can ask your kids to save a certain amount from their pocket money by adding it into the piggy bank. If they receive an allowance each week, you can demonstrate the practice of saving by having them drop a percentage of the total into a savings jar. By making these practices a common tradition, children can become more comfortable with how to save and spend money.

What Is Debt?

You incur debt when you borrow money that you promise to pay back, and this is an essential topic that teenagers need to comprehend. When they are younger and see parents consistently using plastic cards to purchase items, teenagers may not understand that this is money that sometimes needs to be paid back.

An easy way to explain this when you talk to teens about debt is to relate it to borrowing money in regular, daily activities. For example, if you borrow money from a friend to buy a movie ticket or meal out when you forget your wallet, you then have to pay them back. Repaying debt is like this process—debt is money you owe to someone else (typically a lender) that you have a limited amount of time to repay. In most cases, you must repay what you owe plus interest payments. 

One of the best ways to avoid taking on debt like credit card debt is to create a budget and stick to it. Walk your teen through the basics of creating a budget, and that way they will know exactly what they can afford to buy and what they need to save up for. 

Using a Credit Card

Once your child has a basic understanding of how debt works, walk them through what having a credit card looks like. According to Experian data from the fourth quarter of 2018, just over 60% of 18-year-olds have at least one credit card with an average balance of $3,914. That is a lot of money to owe at a young age, and it’s important that you as a parent or guardian are able to teach your child what the responsibility of having a credit card really means.

The teen years are not too early to start having conversations about being a responsible credit card user. You need to explain to your children the difference between debit cards and credit cards, how interest charges and fees work, and what it means to spend money you’re borrowing. 

Credit card companies offer credit cards specifically for high school students, and you can apply for a credit card at 18 years old. Prepaid credit cards are a good alternative to regular credit cards for teens, as they can serve as training wheels of sorts to ease young people into using credit wisely.

To explain these concepts, it can be helpful to review your own credit card statement with your teen. This way, you can walk them through how you used your credit card to make purchases and what types of interest rates and fees you have to pay each month. With insight from you, the next time they see you use a credit card instead of cash, it’s clear to them what type of financial responsibility you’re taking on. 

You’ll also want to point out how easy it is to overspend when you’re not using cash and what an individual needs to do to pay their card off on time and in full. Plus, mention how important it is to not charge more than they can afford to pay off in full each month. Alongside paying interest, teens need to understand how numerous late payments will affect their credit score and their financial future. 

Borrowing for Higher Education Costs

If your child plans to attend college, it’s important to discuss how they, and you as a family, plan to fund their higher education experience. In some cases, your teen may need to take out student loans, which will have an impact on their financial future. 

Taking out student loans will affect your child in both the short term and the long term. While millions of individuals in the U.S. have student debt to repay, research also shows debt has impacted many graduates to delay marriage, buy a car, or purchase their first home.

Once your grace period—the time between when you graduate or leave school and your loan payments begin—comes to an end, it can take many years to pay off student loans. Each month, your child will have to pay a certain amount to the federal government or a private lender, depending on the type of loan and payment plan they choose. If you can help your child understand the toll student loan debt can take on their personal and financial lives, they may choose an alternative (or additional) payment method for college, such as academic scholarships or grant opportunities.

Be sure to sit down with your teen and crunch the numbers on how monthly loan payments could affect their future budget and how long they’ll likely need to spend paying off their student loans. This way, they can better understand what type of financial commitment they’re taking on. 

You can use the student loan simulator from the Office of Federal Student Aid to show your child how interest payments add up over time. If they see the numbers in front of them, they can better understand what they’ll actually spend on college and for how long they’ll be paying. 

How Much Debt Is Too Much?

Having debt isn’t necessarily a bad thing. Plenty of consumers take on mortgage and student loan debt in order to make important progress in their personal, professional, and financial lives. That being said, you want your children to understand how much debt is too much and how they can avoid accumulating it.

One way to help teens understand how much debt they should be willing to take on is to walk them through what a debt-to-income ratio (DTI) is. A DTI compares how much money you need to pay toward debt to how much money you bring home in take-home pay. While it depends on the type of debt you are taking on, financial experts generally advise not having a DTI of more than 15% to 20% of your net income, especially when it comes to renting an apartment.

Frequently Asked Questions (FAQs)

Do teenagers have credit scores?

Typically, teenagers don’t have credit scores, unless they’ve taken out some form of credit. Your credit score is first calculated when you apply for a form of credit, like a credit card, for the first time. Therefore, if a teenager hasn’t built a credit history, they won’t have a credit score.  

Is it better to use a credit card to pay tuition than to use student loans?

Typically, when you use a credit card to cover the cost of higher education, you’ll pay more in interest than you would by taking out a student loan. For example, in 2019 credit card interest rates averaged about 17%, whereas the rates for federal student loans at that time ranged from just 4.5% to 7%. Not only will using a credit card likely cost you more than student loans, but you’ll lose access to important federal protections such as income-based repayment plans, interest-only repayment, or deferment, all of which come with federal student loans.

How do I start a conversation with my teenager about debt and money?

The easiest way to start conversations about debt and money with your kids is to include them in conversations about finances. If your teenage child feels included in these perceived “tough” conversations, they’ll be better equipped to understand the importance of money, credit, and long-lasting debt.