We live in a culture of smartphones, WIFI, home delivery, online shopping and online gaming. Most needs and wants can be met almost instantly.
With so much temptation to spend, it’s important you are focusing on teaching kids about money – and the skills to help them enjoy financial wellbeing as adults.
But should you give your teenager a credit card?
Teaching Kids About Money – Pre-paid, debit or credit?
You might like to start with a pre-paid card or a debit card, so there’s a limit on what they can spend.
Set the rules on what it can be used for and how much they can spend. If they manage the process well and you believe they’re responsible, you could give them a credit card. It which would be a supplementary card connected to your own. (A children under 18 cannot have their own card).
Before you give your teen a credit card, take the time to have a conversation. Chat about credit card fees, interest rates, and how spending irresponsibly can give you a bad credit rating.
Be clear that they will be responsible for all expenditure on the card. If they can’t afford it with cash, they shouldn’t put it on the credit card!
Rules, limits and know-how
Giving a teenager a credit card may seem risky or even irresponsible. But it can be a great tool in teaching kids about money. That’s as long as the right conversations, rules and limits are put in place.
Before you give your teen a card, be sure to speak to them about how it works. Show them how to be responsible with it and how to avoid financial trouble, including:
How interest works
it’s important that they understand that a credit card is like a loan. If they don’t pay it back on time, they’ll be charged interest.
Paying it off in full every month
Show your teen a credit card statement. Explain that if they only pay the minimum amount, they’ll still be charged interest.
Paying on time
Show them where they can find the due date for payments and help them to set up reminders to pay on time every month to avoid interest.
Teach your teen to keep track of their spending, and to never spend more than they earn. Use the credit card’s app to keep a tally on spending.
Start with a credit limit lower than they earn
It’s a good idea to start with a credit limit that is not more than what they earn in a month. For example, setting a low limit for a teen may be $500 maximum so they can consistently pay it off at the end of each month.
Understanding ‘buy now, pay later’ services
The growing popularity of ‘buy now, pay later’ services such as Afterpay, Openpay and zipPay means it pays to help your teen understand how they work, and what the risks are.
These services allow shoppers to buy a product, take it home and pay for it in instalments via an online ‘buy now, pay later’ account, which deducts your preferred debit or credit card.
Added to that, while the buy now, pay later provider might not charge interest on your purchase, you may still have to pay interest to your credit card provider if you don’t pay the full amount owing on your credit card by the due date.
Leading by example
While teaching kids about money is important, one of the most powerful ways to help your kids develop healthy money habits is to lead by example.
Our ideas about money are formed in our childhood, so if your kids see you living with healthy financial habits, they’re more likely to form those habits themselves.
If you’d like advice about how to have this conversation – give us a call.