Teaching teenagers how to use credit cards responsibly is one of the best ways to set them up for financial success. Financially responsible teens stand a better chance of avoiding common financial pitfalls like falling into debt or being blindsided by poor credit when it comes time to apply for loans, apartments, and even some jobs.
Unfortunately, many teens receive little or no credit education, despite parents’ awareness that money talks are so important. A recent Credit Sesame survey revealed that nine out of 10 parents talk to their kids about other money topics. The ins and outs of credit cards just don’t make the list of talking points.
Credit Sesame recently partnered with FamZoo to reach out to teenagers (ages 12-17) and test their knowledge of issues relating to credit scoring and smart credit behavior. With the help of their parents, 222 respondents took a brief quiz, followed up by a couple of survey questions. All results as of August 2017.
Answers that cause us concern:
- Nearly one in five teens doesn’t know what a credit score is
- Nearly one in ten teens think a credit score is based on how much money you earn
- Nearly one in five teens think one smart way to use a credit card is to buy something you can’t afford right now
- Among teens who already have a credit card, nearly half believe that they are responsible for fraudulent charges on an account
The answer that gave us the most hope:
- 85% of teens know that using credit cards to borrow money without having to pay it back is NOT socially acceptable
So, what’s the best way to teach teens about how to use credit cards safely to build credit?
Teach By Example
Before you can teach your teen about good credit behavior, it’s important that you learn how to serve as a positive role model yourself.
Luckily, you don’t have to be an expert. Part of great role modeling is a willingness to learn. Even if you don’t know all the ins and outs of how credit works, now is a great time to learn and start demonstrating good behaviors. Let your teen see you prioritize your spending on what’s important to your family and make payments against debt.
Even if you’ve fallen off of the good-credit-behavior bandwagon (or missed it the first time around), jump back on and review credit basics. If you play your cards right, your own credit score will go up as you help your teen to establish one of his/her own.
What do teens need to know about credit cards?
Learning about credit isn’t as hard as studying for the SAT. Still, there is some basic terminology you should go over with your teen:
- Credit limit
- Interest rate
- Credit score
- Credit report
How credit cards work may seem obvious to you, but take the time to let your teen know how they work as well.
The most important takeaway is to pay off your charges in full and on time each and every month.
You can use an online credit card interest calculator to illustrate how costly debt is for consumers who can’t get a handle on this basic principle.
Explain how a credit card affects credit score. You can use Credit Sesame’s credit guide to show how a credit score is calculated.
Discuss the cost of a bad credit score. In a nutshell, bad credit leads to higher costs overall for the financial products most of us need. Those additional charges are made up of money that would be better off in your (or your teen’s) pocket.
Practice, practice, practice
All the talk in the world can’t replace real, live practice. Learn by doing.
Let your teen use a credit card.
Yes, you read that correctly. The best way to master money management is to practice good financial behaviors (not just read or talk about them). At what age? That’s up to you. But before he leaves home and strikes out on his own, Junior should already know what it feels like to make charges on a card and then pay them off when the bill comes. We’ll discuss some different options for how to do this in the next few sections.
Draw up a contract
A credit card isn’t a license to spend. It’s a tool of convenience, to buy something today that you can afford and are able to pay off within a few weeks or sooner. But to someone new to credit cards, it can feel like a permission slip to purchase every fancy.
Set up ground rules.
- Who will pay the bill?
- What’s the monthly spending limit?
- What purchases can the card be used for?
- How often will you review your statement together (weekly, biweekly, monthly)?
- What will happen if the bill isn’t paid (take money from the child’s savings, lock down the card, or assign extra chores, for example)?
Let your teen know exactly what is expected and the consequences for violations.
Use a training credit card
Prepaid debit cards are a great teaching tool when you’re ready to introduce plastic to your child. You load funds to the card. Your teen can spend until the money is gone.
The advantage of a prepaid card is that you can let your teen get acquainted with cards without the risk of debt, and with whatever spending limits you want to set.
The disadvantage is that prepaid cards do not build credit. Your teen also won’t get any experience paying the bill at the end of each billing cycle.
One of the best prepaid debit cards for teens is from FamZoo—a company dedicated to making fun financial education products for families. Both you and your teen will get a prepaid debit card. The parent owns the main card and funds the subaccounts from it. You can load funds at will, or on schedule, such as for allowance or chores.
You’ll have access to FamZoo’s complete line of budgeting, savings, and other financial training-wheel tools. We think one of the best features is the ability to automate interest payments. Want to teach your child the value of compound interest over time, and that the best way to save for the future is to start right now? Set up interest payments to your teen’s account at a level that’s high enough to teach the value of compounding in a very short time (ten percent, compounded weekly, for example).
FamZoo charges a very small monthly fee, and longer plans are discounted.
Add your child as an authorized user on your account
As your child demonstrates good purchasing behavior, the next step is to teach how to use (and pay off) credit. Open up a new credit account and add your teen as an authorized user.
You’ll have control over the account, but your teen will have her own card, with her name on it.
The biggest advantage is that the account will help your teen establish a credit file and build a healthy credit score. The data associated with the account will appear in your file and in your teen’s file. Of course, you’ll need to keep utilization low and pay the bill on time, or both of you will suffer the credit consequences.
One potential drawback is that you, as the primary accountholder, are fully responsible to repay the debt, no matter who makes the charges. On the upside, if things don’t work out, you can remove your teen as an authorized user by contacting the issuer.
Check with your credit card issuer to see if they have a minimum age requirement for authorized users. Most card issuers do not, but a few require authorized users to be at least in their mid-teens. In addition be sure to check with the credit card issuer as to their policy around co-applicants and co-signing as not all credit card issuers allow or accept co-applicants and co-signing.
Help your child choose a student credit card
Some banks offer teens credit cards starting at age 14 with a parent co-signer. At the age of 18, your teen is eligible for a student credit card. Between 18 and 21, the teen will need to show proof of income or ask a creditworthy adult to co-sign the application. A reminder, be sure to check with the credit card issuer as to their policy around co-applicants and co-signing as not all credit card issuers allow or accept co-applicants and co-signing.
Co-signing is serious business. If your child gets into trouble with a card that has a co-signer, that trouble will damage the co-signer’s credit. Furthermore, the co-signer is legally responsible to repay the debt. As a co-signer, you can’t drop off the account if your teen messes up. You’ll need to go through a process to request account closure instead.
Secured credit cards for teens
If your teen wants to start building credit on her own without a co-signer, she can open her own secured credit card. She’ll have to make a deposit as a guarantee against default. The card still works like any other credit card – use it to make purchases and pay the bill each month. If you carry a balance, you’ll pay interest until the balance is paid off.
Opening a secured credit card is advantageous to you because you won’t be asked to cosign for the credit card. If your teen messes up, your credit report won’t be damaged. If your teen fails to pay, you won’t be held liable for the payments. For all of these same reasons, a secured credit card is an excellent option for someone who wants to build credit.
After you help your teen establish good credit habits while young and still under your eye and guidance, you can gradually transition your child to a full-fledged credit card (secured, student or otherwise). A gradual transition with increasing levels of responsibility is the best way to ensure that your teen has the skills needed to successfully navigate the choppy credit waters.
Teach your teen about credit and credit cards
Teens may say they know the ins and outs of credit but our survey reveals reality. A single chat or a few talks about credit and credit cards isn’t enough. Among teens who say their parents have taught them about credit, many still get important details wrong.
- 29% of teenagers whose parents have educated them about credit cards still don’t know what a credit score is, or have the wrong idea about it
- 13% of teens whose parents have educated them about credit cards still think a smart reason to use them is to buy things you cannot afford
- 46% of teens whose parents have educated them about credit cards mistakenly believe that they are responsible for fraudulent credit card charges
No matter how much confidence your teen has in her credit expertise, explain anyway, and give plenty of opportunity to practice.
Disclaimer: The article and information provided herein are for informational purposes only and are not intended as a substitute for professional advice.