Talking to your child about credit cards is as critical as teaching them to drive, instilling a good worth 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 they’re more likely to be smart credit card users when the time comes.
Children should understand that credit cards can be a great tool when they’re used correctly. They also should understand the dangers of misuse—credit cards can destroy your financial life. If you feel that you don’t know enough about credit cards to teach your child, brush up first.
When is the right time? By your child's early teens, if they don't start asking sooner. But start with basic money concepts first. Let your child gain some experience spending money they earn from an allowance, a part-time job, or doing chores. You might even let them borrow money from you a few times to demonstrate how loans work.
Lessons for Your Child About Using Credit Cards
When the time comes, here are the most important lessons to teach your kids about credit cards.
Lesson 1: It’s Not Your Money, and It's Not Free
Kids often grow up thinking mom and dad's credit cards are just magic. That money needs to be paid back, however, and the longer it takes, the more it costs. The first thing to teach them is that a credit card just lets them use someone else’s money. The bank agrees to let a cardholder borrow a certain amount of money over and over as long it's repaid. The balance can be repaid all at once or 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 how and when interest is charged.
Lesson 2: You Shouldn’t Rely on Your Credit Card
Because credit cards and debit cards look virtually identical, your child may have grown up thinking you’ve used your credit card for all your purchases. Explain that a credit card is not meant for staples like food and gas. Teach your child that their checking account, which holds the money they’ve already earned, should be their primary way to pay for purchases—even big ones. Lessons about savings and delayed gratification are foundational.
Lesson 3: There’s a Limit to What You Can Purchase on a Credit Card
Credit card issuers impose a credit limit—a maximum balance the cardholder can hold. Warn your child against racking up big balances since that will keep them from being able to use the credit card when something important comes up.
Keeping a low credit card balance is also responsible because it’s easier to pay off and helps build a better credit history. A balance below 30% of the credit limit is ideal. Show your child how to calculate the ideal credit card balance by multiplying their credit limit by .30, and teach them to monitor their balance regularly.
Lesson 4: Your Creditor Isn’t Okay With You Missing Payments
Parents have immeasurable patience with their children, who often take this for granted. But kids must learn that everyone won’t be as patient, especially not when it comes to money and credit card late fees.
Explain to your child that, while the credit card issuer won't knock on the door for a missed payment, they will charge fees. They will also call, send letters, and may eventually decide to sue for an unpaid credit card balance, no matter the amount. Worse still, credit card companies report late payments to the credit bureaus, which will damage one's chances of getting another credit card in the future.
If you’ve co-signed on a credit card with your child, make sure they understand that you are also penalized for their credit card misbehavior. And, like the creditors, you won’t be patient because your credit is on the line. Have a one-mistake limit—one missed payment, one over-the-limit transaction—and then close the account until they are ready to be more responsible.
Lesson 5: Don’t Let Friends (Or TV, Internet, Salespeople, Etc.) Influence Buying Decisions
Credit cards can provide a major opportunity for peer pressure or marketing manipulation. Be sure your child understands the impact of advertising and its presence everywhere. Teach them to make sound spending decisions by avoiding impulsive buys. Talk about how their friends influence their choices, and how they can think critically about that. After all, your child is paying the bill, not their friends, and certainly not TV and internet advertisers.
Lesson 6: You’re Being Graded
Every consumer who borrows money through a financial institution has a credit score, and, no, kids aren't graded on a curve. Their credit score, like yours, is based on credit report information, a document that includes your child's credit card history. The most popular version of the credit score ranges from 300 to 850, with higher credit scores being better. Responsible credit behavior will result in a better “grade.”
Explain the benefits of a good credit score to your child. These include better interest rates, approval for loans in the future, lower security deposits on utility services, and improved chances of getting other credit-based applications approved, just to name a few.
Lesson 7: Only Use Your Credit Card If You Can Afford to Pay It Back
This will likely be the exact opposite of everything your child has thought about credit cards. Making charges they can’t afford to pay back leads to a cascade of other credit card problems: missed credit card payments, late fees, higher interest, and a bad credit score.
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. Many kids are more likely to be responsible with their finances when they know mom and dad won’t cover up their mistakes.
Lesson 8: Mistakes Will Follow You for Years to Come
Credit card mistakes aren't insurmountable, but they are difficult to recover from, and the damage to your credit report can often haunt you for years. Help your child envision the trouble that could come from credit mishaps: When it’s time to get a job, the employer may check your child's credit report and opt to hire someone with a clean credit history. Or, your child may try to rent an apartment, only to have the landlord turn them down because of outstanding credit card debt. They may not be able to get an auto loan for their first car because of past credit problems.
Once your child has a credit card, check-in with them every once in a while to see how things are going and to answer any questions, at least in the beginning. Make sure you’re giving the correct answers or pointing them to reliable resources. It's an exciting responsibility, but one for which they should be well-prepared.