About 75 percent of young adults have a credit card by age twenty-five, according to Forbes. But many young people do not know about credit, how to build and maintain it, or the importance of having a good credit score. At least one-quarter of young adults with credit cards are in debt. That’s why it is important to start teaching your teenagers how to manage their money responsibly and use credit correctly before they get their first credit card. Of course, this can be challenging, but it is a crucial aspect of a teen’s financial education.
Starting the Conversation
The best time to discuss credit cards with your teen is well before they sign up for their first card. Before they apply for a credit card, educate your children on the significance of maintaining good credit and how credit scores affect future credit applications. You can discuss the dangers of high-interest rates and the long-term effects of carrying credit card debt for lengthy periods. Once they open a credit card, it is important to explain how to pay the bill on time, how minimum payments work, and how interest accrues.
When to Get a Credit Card
The ideal age for teens to receive a credit card is when they are eighteen years old or older. At this age, they can legally apply for a credit card without a co-signer. Before this, you could consider adding your child as an authorized user on your credit card. Doing this can help your child understand the basics of credit cards while building their credit score from an early age. However, it is important to ensure they understand the consequences of their actions and maintain a responsible approach to spending.
Length of credit history is a component of a credit score. The earlier a young adult receives their first card, the sooner they can start to build credit that may help in applying for a car loan, applying for their first apartment, and more. Having a steady source of income for repayment before getting their first credit card is crucial to financial health.
How to Help Kids Understand Credit
As a parent, it is important to help your teens understand how the basics of credit work. This means talking to them about budgeting, the importance of paying bills on time, and the dangers of overspending. Remember to explain the basic terms of credit cards during these conversations.
Start with the following terms:
- Interest rate – the amount charged by a credit card issuer for the use of the available credit
- Credit score – a prediction of your credit behavior based on information from your credit reports
- Statement balance – the amount shown on your monthly billing statement that reflects the full amount owed on the credit card
- Available credit – how much credit you have available to spend
It’s critical to talk with your teen about the importance of careful usage of their credit card and the prompt payment of their credit card bill. Teach them about using credit before they mature into card-bearing young adults to avoid future pitfalls.
A Few Extra Tips
When teaching teens about credit cards, make them aware of credit card fees. For instance, credit card annual fees and late payment fees can accumulate quickly and result in higher payments. It is also worth discussing grace periods to avoid incurring interest, as interest can be costly. Essentially, explain to them that paying interest means paying extra for goods and services bought with a credit card. Advise them to pay off the balance in full every month, eliminating the possibility of accruing interest.
Your teen needs to understand that bad spending habits can quickly escalate to debt, resulting in financial struggles. It is a great idea to involve real-life scenarios, such as the importance of staying well within the credit limit, keeping track of spending, and avoiding high-interest cash advances or gambling. Be sure to include all the positive things that credit can do in these conversations and give them some incentive to want to learn and practice good habits. If you have personal experience with credit from your early card-holding days , it might be worth sharing those with your teen – both good and bad experiences.
Talk to your child about how to choose the card that is right for them by looking at annual fees, interest rates, and rewards like cash-back. When it’s time to apply for a credit card, review the offers closely with your child. Some may come in the mail, other credit cards are available through your family’s favorite store, or you can talk to a representative at your bank for guidance.
Understanding credit is essential for young people to begin to take control of their financial future. By teaching your teens about the importance of responsible credit use now, you can help them build a strong credit history and set them up for financial success. Remember to encourage them to start small, monitor their credit score regularly, and always use credit responsibly.
You are your kids’ best teachers, and this is an important topic – a better understanding of credit leads to a better future.
