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How and When to Educate Your Teen on Credit Cards
Teaching young people how to successfully use a credit card takes a little research, a lot of patience, and a mirror.
Since you were probably wondering, the mirror is for flipping the usual way young people think about credit. Left to their own devices, teens and young adults often see a credit card as free money, an invisible bag of loot. What your child saw as loot is actually, when the word is looked at in the mirror, a tool.
Do you have to give a young person a credit card to start the education process? Not necessarily. But since studies have shown that 80% of American adults have a credit card, why not get your child started on using a card while you can more easily supervise and guide its use? While some may worry that giving a young person a credit card is just needless exposure to temptation and debt, a credit card can be a very effective way to help your child learn to make solid decisions on their own while also building good credit.
Here are some tips for helping a young person learn how to use credit wisely, before and while having a credit card.
- Share your experiences. Young people usually learn best by example, so allow your child to see how you use credit in the store and when the bill comes due. When you are shopping together, ask if you should put a particular purchase on a credit card. After getting an answer, ask the criteria for the decision. If you have made mistakes with credit in the past, share this so your child can learn from your missteps.
- Determine what age is right to get the card. While anyone below the age of 21 now either needs an adult co-signer or proof of income to get a credit card, that doesn't mean a young person has to wait that long to begin using credit. If you have a child who is mature and responsible at age 18, it could be fine to open a card. If you feel your child may need a bit more financial seasoning before getting a credit card, consider starting them off with using a debit card tied to their own checking account and switching to a credit card when you feel that sound decision-making tools are in place.
- Talk about positive and negative outcomes. Most teens aren't thinking about qualifying for a good interest rate on a mortgage. Think about what your child would want to have good credit for. Most teens would like to have the financial freedom to buy a nice (or nicer) car. So explain that having good credit could help to qualify for a loan to get that car, secure a good interest rate, and have some extra money to put in savings for repairs. Conversely, when talking about the consequences of not paying on a credit card, explain that it can mean being sued and having 25% of future paychecks taken away - making it a whole lot more difficult to afford that car.
- Research together which credit card to get. This gives you a chance to talk about the importance of a card with no annual fees, low interest rates, etc. It also helps you to gauge how ready your child is to take the final step of getting the card.
- Start with a credit card with a low limit. This way, if your child makes some errors in judgment, the debt won't be too large to overcome. The mistakes will be ones that the child can eventually pay back, which sends a stronger message about not making those mistakes in the future.
- Develop a plan for the credit card. Usually, the best way to build credit is to put a small charge on a credit card each month and pay it off in full. Talk with your child about having a personal policy of "Credit Building and Emergency Only" for the credit card. The card could be used only to pay one existing recurring expense each month and then the rest of the available limit could be held in reserve for true emergencies. This will help you to emphasize that credit cards should never be used for discretionary expenses. This is also a great time to look at an overall budget for the young cardholder and to stress the importance of an emergency savings account.
- Make the credit card your child's responsibility. A credit card is one of the big first steps in learning how to manage obligations independently. If your child makes an error in judgment, resist the urge to offer a "bail out." It can send a very dangerous message if mistakes don't hold real consequences. Additionally, it helps to make the lessons of using a credit card "real" if the money used to pay the credit card is the child's own, whether that is from a part-time job or an earned allowance.
- Go over the first few bills together, with periodic check-ins later. Once your child gets the first credit card bill, spring a quiz on terms like APR, minimum payment and other relevant information on the bill. Be sure to ask when this payment is due, and what the plan is for keeping track of when future payments are due. Using a financial calculator, show how much and how long it would take to pay off the debt by making just the minimum payments.
Remembering these steps will help you to send your child out into the world with good credit, a healthy relationship with debt and an understanding of the importance of discipline.