Of all the financial skills parents must teach, the appropriate use of a credit card is among the most important. Teens and credit cards can get into a lot of trouble together. It’s just too easy to make costly credit card mistakes with plastic if you’re not familiar with how it works. But because teenagers can’t get their own credit card until they’re at least 18 years old, it can be tricky to teach them how to responsibly use credit in a hands-on way.
4 Lessons about Credit Your Teen Needs to Learn:
1. How credit cards work
If you haven’t explained how credit cards work, now’s the time. The most important point to stress: It’s not free money, but rather a convenient way to pay. Emphasize that it’s best to treat a credit card like cash: Don’t buy what you can’t afford to pay for each month.
2. How interest works
When you pay with a credit card, you are borrowing money, and if you don’t pay your balance when it’s due, you’ll be charged interest (a lot of interest, in fact). Chances are, your teenager has no understanding of how interest works, so you’ll need to explain it. You can also use an online calculator (bit.ly/YT-credit) to demonstrate what it means to pay interest on a credit card debt.
3. How to review credit statements
Your own statements can serve as a learning tool here. Talk about what each section means. Explain the consequences of late or missed payments, which, in addition to interest, include fees and a hit to your credit rating. Also point out the “minimum payment due,” and explain why this is not what you should pay, but rather the least amount you can pay and keep the card active.
4. The difference between a “credit limit” and an actual budget.
Credit limits are confusing, especially for teenagers. Stress that just because the credit limit is, say, $5,000, that doesn’t mean they should spend $5,000. In general, teenagers who learn to budget will be better equipped to use credit responsibly than those who don’t.
Practice always helps us learn, and this is true with credit cards as well. You can add your teenager as an authorized user on your own card around age 14 (depending on the card issuer). If you decide to take this step, set strict limits for how your teenager can use the card, and be sure to review your child’s spending each month. A great way to drive home the importance of sticking to a budget is to require your teenager to reimburse you for his credit-card purchases each month, and charge him interest if they can’t.