February 12, 2025
Teens are often excited about getting their first credit cards, but if not used responsibly, it can cause them serious financial issues. See here how to teach your teen about credit cards.
Teaching children about money is something all parents do at some point. However, teaching them about credit can be more difficult. When we say children in this instance, we mean teenagers who are likely to be getting their first credit card in the near future or who have gotten a credit card recently.
Introducing teenagers to the world of credit is important to their financial journey. As they transition into adulthood, understanding how credit works and developing responsible financial habits early on can set them up for success and financial well-being in the future.
One way to prepare teens for credit card use is by introducing them to either a debit-credit card (like Visa Debit) or a prepaid/reloadable credit card. A Visa Debit card lets teens make purchases online and in stores using money from their bank account, mimicking the process of a credit card but without any credit risk.
Prepaid credit cards have a with a fixed limit determined by amount loaded onto the card, this can act a bit like a credit limit, making your teen consider what they want to spend the money on.
As parents, guiding teenagers through the basics of credit is crucial, especially as they approach milestones like getting their first credit card. There are two key areas teens should be aware of as they begin using credit: credit scores and responsible bill-paying habits.
Start by explaining the concept of a credit score in simple terms. You don’t need to explain all the ins and outs of how credit scores are calculated, but there are two things that should be emphasized.
This is a chance for you to lead by example. Show your teenager how you pay your credit card bill, through an app or online. Explain that paying in full and on time means you’ll avoid interest charges on the bill.
Physically showing how you pay your bills on time and in full can help your child gain confidence in using credit in a responsible way. This is also a great time to talk about having a credit card limit that meets your needs and not fall into the trap of constant limit increase offers.
Many banks now offer credit cards with lower-than-normal interest to students getting their first credit card. Asking the bank if they offer this, or even just comparing interest rates of a few different credit cards, can help ensure your child gets the lowest interest rate possible.
Interest charges are a fact of using a credit card, but they can be confusing to anyone who has only ever used a debit card or cash to pay for something themselves. Explaining interest and how it affects a credit card bill can demystify this for your teen. A simple way of explaining interest to teens is to say that when you buy something with a credit card, you’re really using the credit card company’s money, not your own.
The credit card company then charges you a fee if you don’t pay them back at the first opportunity, i.e., when your credit card bill comes.
That’s why if you pay in full, you avoid interest; if you don't, then you must pay more.
It’s important to highlight that credit cards have very high interest fees, about 20% for most credit cards. This means if you don’t pay in full when the bill arrives, you’ll be charged a large amount extra.
Interest can mean paying much more for the item than it originally cost, so explaining this is vital.
Minimum payments are the very lowest amount you can pay on your credit card bill each month. It’s important to talk to your teen about the fact that, while you can choose to pay only a small amount, this is not a responsible way to handle credit.
It’s important to explain that only paying the minimum means paying more over time.
This turns small balances into long-term financial burdens. If you keep using the card and only paying the minimum, you'll accumulate large interest charges as well, and there’s a real risk of maxing out the credit card.
Moreover, carrying high balances relative to credit limits due to only making minimum payments can lead to a drop in a person’s credit score.
Credit utilization refers to the percentage of your available credit that you are currently using. For example, if your credit card limit is $1000 and you have a balance of $300, your credit utilization is 30%.
It's essential to teach your teenager about maintaining a healthy credit utilization ratio. Stress that they should never use more than 30% of their credit limit at one time.
Keeping credit utilization low shows responsible credit management and can positively impact credit scores. Explain that high credit utilization suggests financial strain and may lower credit scores.
Encourage your teenager to monitor their credit card balances regularly and aim to pay off balances in full each month to keep credit utilization in check. By understanding and managing credit utilization wisely, they can build a strong credit history and financial foundation for the future.
Whether your teen has recently gotten or will soon be getting their first credit card its important to ensure they know how to handle it in a responsible manner.
Equipping your teen with this knowledge can help them begin to use credit in a way that is responsible and helps them begin to build their credit history. They’ll feel more confident when using their first credit card and will be able to avoid the pitfalls that many young adults fall into when first beginning their credit journey.
Using the strategies outlined in this article can set them up for financial success in the long-term.
February 12, 2025
Teens are often excited about getting their first credit cards, but if not used responsibly, it can cause them serious financial issues. See here how to teach your teen about credit cards.
