How to Talk to Your Teens About Credit Cards
Americans owe $854.2 billion in credit card debt, with the average household carrying a balance of $15,191 on their credit cards. As a parent, you don’t want your teen to contribute to that statistic. That’s why offering savvy credit management advice early on is especially important. Informed teens understand the risks associated with abusing their credit card, so be sure to cover the following five topics before you sign up for that card.
1. Communicate who will foot the bill
It’s tough to watch your child struggle to pay off debt, especially when you can cover their expenses. However, bailing them out will prevent them from learning how to spend wisely. The National Foundation for Credit Counseling advises you not to bail them out, but to take them to a credit counselor to encourage them to ask for help when they need it. By setting boundaries and pointing them to experts who can help, you enable them to independently find solutions that will get them out of debt.
2. Teach them the value of spending responsibly
Let your teen know when it’s wise to use credit and when it’s not. At first, only allow your teenager to use the credit card for emergencies. This will get them accustomed to prioritizing needs over wants. Then, gradually allow them to make other purchases with the card as they demonstrate good payment habits.
Emphasize that a credit card is essentially a loan, so they shouldn’t purchase something they cannot pay off later. Make sure they understand that not paying their bill in full each month means they’re in debt. And the longer they wait to pay off that debt, the larger it grows.
3. Explain and compare terms and conditions
Make sure your teen has a solid understanding of interest rates and how they impact a credit card bill. Explain that if they don’t pay their bill in full each month, they’ll actually owe more than they spent.
Consider the fact that they may not know that different credit cards have different APRs and fees, and that some cards have rewards they can benefit from. Take the time to sit down with your child and compare different terms and conditions to demonstrate how much they can vary from card to card.
4. Emphasize security
Depending on how they’re used, credit cards can be a more secure option than debit cards. Debit cards are linked directly to your teen’s checking account. If a scammer or hacker gets a hold of their debit card information, they can wipe your teen’s account clean. Fortunately, consumers are limited to $50 in liability for stolen credit cards, but in addition to informing them about the perks that come with using a credit card safely, share online safety tips, so they can avoid identity fraud. Those skills will come in handy in all areas of personal finance.
5. Encourage credit report and credit score monitoring
Teens should understand what goes into their credit score, so they’re aware of the impact of their credit behavior. Get your teen in the habit of regularly monitoring their credit score by reviewing it with them every four months. Compare their score with their credit report. The Consumer Financial Protection Bureau recommends ordering a free credit report from all three major national reporting agencies: Equifax, Experian and TransUnion.
Review the reports together to ensure there are not any mistakes. Occasionally checking their credit score and comparing with the report will also help them connect their behavior to consequences. Some creditors offer free credit scores, but if theirs doesn’t, you can pay a fee to access it through the credit bureaus.
It’s inevitable that your children will be responsible for managing their own credit at some point. Your children will thank you for starting them off on the right foot by teaching them how to develop healthy spending habits early on.
|Laura Woods writes on personal finance for NerdWallet. This article was provided compliments of NerdWallet.com, a consumer finance news and comparison website committed to helping you save money.
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