Helping teens understand credit.
Parents play a vital role in educating their teens about smart money management. However, trying to teach teens about money can be overwhelming because there are so many things to learn. An effective strategy is to start with a single topic — credit cards. This subject can help introduce important ideas like budgeting, being careful with money, and keeping a good credit score.
Hands-on lessons are often the best way for young people to learn. But instead of signing them up for a credit card right away, think about starting with a prepaid debit card. These cards can lay the groundwork for basic credit card lessons. Here’s how:
- Prepaid debit cards are preloaded with a set amount of funds. When your teen makes a purchase, the amount is subtracted from the balance of the card. Once funds are depleted, the card cannot be used until it is reloaded, preventing the accumulation of debt.
- Prepaid debit cards allow teens to practice budgeting, tracking expenses, and making spending decisions in the real world without the hazards of traditional credit cards.
- Teens can learn responsible spending habits, like prioritizing purchases, avoiding impulse buys, and keeping track of their remaining balance.
- If your teen makes mistakes, like spending too much on a single purchase or not managing their balance well, they can learn from the experience without hurting their credit score.
Parents can monitor their teen's spending online and provide feedback, helping them develop healthy money management skills in a low-risk environment.
Teens can use prepaid debit cards to:
- Make purchases in person, online or by phone.
- Give gifts to friends and family.
- Withdraw cash from an ATM or bank.
- Receive wages or funds by direct deposit to the card.
When your teen is ready for a traditional credit card, pick one with a low credit limit. This makes it harder for them to overspend or get into too much debt. Meet at least monthly to talk about how to use credit cards wisely and check in on their progress. A sample schedule might look like this:
Lesson 1: Teach them how to set spending limits and make essential expenses a priority over things that would be nice to have.
Lesson 2: Share the main way to avoid interest charges and debt accumulation. HINT: It’s by paying the full credit card bill each month.
Lesson 3: Explain why reviewing monthly credit card statements is key to sticking to a budget and making payments on time.
Lesson 4: List the problems that can result from missing payments or maxing out credit lines.
Lesson 5: Discuss how using credit cards responsibly can affect their future ability to borrow money, rent an apartment, or get a job.
Some parents might worry about giving their teens a regular credit card. However, doing so under direct supervision allows young people to build a credit history and develop good financial habits from an early age.
Remember, your own money habits have a big impact on how your teen handles money. Set a good example by paying bills on time, keeping low balances, and avoiding spending on a whim. You could also share some of your own money wins and struggles with your teen. Being open builds trust and helps them learn.
