Talking to your child about credit cards is as critical as teaching them to drive, instilling a good work ethic, and telling them about drugs and alcohol. Many kids and teens are excited at the prospect of getting a credit card, but often for the wrong reasons. Combat their misconceptions early, and, when the time comes, they’re more likely to be smart credit card users.
When is the right time to start teaching these credit-based lessons? By your child's early teens, if they don't start asking about the topic sooner. Starting with basic money concepts allows your child to gain some experience spending money they earn from an allowance, a part-time job, or chores. You might even let them borrow money from you a few times to demonstrate how loans work.
Every parent or guardian will introduce the topic of credit to their teens differently, but no matter how you go about it, this basic guide will help you start.
- A basic understanding of money is the foundation for using a credit card.
- As a teenager or young adult, managing a checking account and debit card offers practice with electronic spending.
- Parents or guardians should establish that credit cards are a way of borrowing money.
- Introducing the concept of a borrowing reputation shows that good credit card habits are important in the long term.
Start With Money Basics
Before you teach about credit cards, make sure your child has an understanding of how money works, where it comes from, and how we spend it. Once they have a basic understanding of personal finance and the economy as a whole, you can start discussing good money habits.
Discuss saving habits and creating a spending plan as a segue into credit. By setting up this foundation for your child or teen, they will understand the impact of keeping promises to pay back what you borrow.
Ease Into It With a Checking Account
Since most money is deposited and spent digitally these days, having first-hand experience managing a checking account helps your child understand the idea of spending money electronically. Once your child is getting regular income, from an allowance or part-time job for example, opening a checking account with a debit card helps them get used to making non-cash purchases.
Teach your child the importance of tracking their balance and avoiding spending more money than they have available. Note that there are consequences for misuse of a debit card, such as banks charging an overdraft fee when someone spends more than what they have, and that these fees add up. Too much overspending can force the bank to close the account and add you to a list of risky banking customers, which will impact credit down the line.
When you start discussing debit cards, it’s important to note the dangers of entering personal and financial information online. The Consumer Financial Protection Bureau (CFPB) recommends telling teens to avoid taking photos of their debit card or clicking on discount promos that appear while they are purchasing something online.
Introduce Credit Cards
Because credit cards and debit cards look virtually identical, your child may have grown up thinking they're the same thing. Make sure your child understands the difference between the two payment methods. Specifically, describe how credit cards allow you to borrow money from the bank over and over, so long as you continue to make monthly payments toward the balance.
Credit card balances can be paid over time, but your child should know that the longer it takes to pay back the balance, the more the interest will add up. So, they should know what interest is, as well as how and when interest is charged.
You can use a credit card calculator, such as this one from Experian, to show the cost of paying a credit card balance over time rather than all at once.
Explain to your teen that while the credit card issuer won't knock on the door for a missed payment, it will charge a late fee. It will also call, send letters, and may eventually close the credit card account for good if missed payments continue.
Another important topic to discuss is co-signing. If you as a parent or guardian co-sign on a credit card with your child, make sure they understand that you are also penalized for their credit card misbehavior.
While credit card issuers impose a credit limit—a maximum balance the cardholder can hold—it may be helpful to set a personal rule for credit card purchases with your teen. For instance, you may limit credit card purchases to $20 or the maximum amount you can afford to pay in full each month.
Your child has to be in the habit of thinking about their income for the immediate future before making credit card purchases. If you aren't going to rescue your child from their credit card mistakes, let them know upfront and stick to your word to encourage them to be responsible.
Credit card issuers make it easy to know what you owe and what you're required to pay by sending a billing statement each month. In addition, many credit card issuers offer account access online or via a mobile app. With these tools, your child can quickly see their account details and even make their monthly payment.
Introduce Credit Reporting and Scoring
Reputation is important, even when it comes to finances. Credit card usage becomes part of a borrowing history, or credit report, which other businesses use to review new applications.
Most companies use a credit score to measure this reputation, which is calculated based on a person's borrowing history. The credit score is a quick way for companies to decide who has a strong borrowing reputation. Previous late payments or high balances taint your borrowing reputation and make it harder to get approved for other things like new credit cards or loans, utility services, an apartment, a cell phone, or sometimes even a job.
In most cases, credit scores range from 300 to 850, and the higher the score the better for your financial future.
It may take a few lessons and some hands-on experience for your child to fully understand using a credit card. Hopefully, this early guidance will set them up for a lifetime of success with managing debit and credit cards.