Teaching your teens about credit
One day your children will need a good credit profile. They’ll want to get property or their own transport and this is not possible, or at least it is much harder, without a good credit profile. Is it advisable to introduce your children to credit at an early age, or is it better to let them learn from their mistakes when they are in their early or late 20s?
You need to decide what works for your family; however, it is always better to teach children and teens how credit works. Point out the dangers of too much debt and how they can avoid high credit card bills.
We could compare this to teaching children and teens about alcohol – or anything that society considers a ‘necessary evil’ – while they are young. The parent has enough control over the child’s actions and would be able to intervene – quickly – should anything happen.
So how does one teach children and teenagers about credit? And what is the most important rule that they should heed?
• Start with the basics
Do this as soon as they know what numbers are. Explain that sometimes people need to pay for things but they do not have the money to do so. That is why we invented credit. Talk about compound interest and how it can affect one’s finances – negatively as well as favourably.
Instill this motto in them: If you can’t afford it, you can’t afford it. Tell them to wait until when they can afford to buy something in cash.
• Let them have their own bank accounts
Young children will delight in having their own bank account and their parents can use this to teach them about simple banking transactions. This works especially with children whose parents give them spending money. Let them save a portion of the spending money as an exercise in compound interest.
• Use yourself as an example
All these lessons will only sink in if you are a savvy consumer. If you wish, you could show them your credit card and mortgage statements. Show them the true cost of financial irresponsibility by discussing interest rates, minimum payments, grace periods and finance charges. Explain why retailers and banks charge late fees how that can create payment problems.
• Debit cards and prepaid credit cards
These cards have their own advantages and disadvantages. Teenagers should know the difference between these two types of cards. Most prepaid credit cards are designed for older teenagers: users should be at least 18 years old.
• The importance of a budget
Show them how to draw up a budget and also show them yours. Most teenagers have limited expenses so this should be an easy exercise. Explain how some the frequency of expenses – weekly, monthly or yearly – affect budgets and how to estimate how much they would need to meet all their expenses.
• Save, save, save
Teach them that they should pay themselves first. Saving money regularly can help them in many more ways than just having more money to buy bigger and better products. They’ll learn discipline and perseverance; they’ll feel in control of their financial lives; they will have less reliance on credit.
• Their own credit card
Consider getting your teenager a credit card that is linked to your personal credit card. Do this once you feel comfortable with their knowledge of credit and make sure they know that owning a credit card places a big responsibility on them. Emphasise how privileged they are to have a credit card, even though it is linked to yours.